Question: a) As finance director of a company that is currently having a fixed rate loan that has 1 year left, you are considering using a

a) As finance director of a company that is currently having a fixed rate loan that has 1 year left, you are considering using a forward rate agreement (FRA) to turn that fixed rate exposure into a floating rate loan, starting in 3 months time. What FRA contract should you enter into? Clearly describe your position by stating whether you enter into the FRA as the party that pays fixed or floating.

b) Provide an example where an interest rate swap can be used to transform a fixed rate investment into a floating rate investment. What would be the motivation for such fixed-for-floating transformation?

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