This client will buy a building a year from now to centralize its headquarters, currently scattered in five different locations. To do so, it will have to borrow 1.5M$. Given the inflationary environment, the client is afraid that interest rates will increase and would like to secure the interest rate on a 10-year loan today. The current interest rate today for 10 years is 2.50%. On the market, you find counterparties willing to enter an FRA at 2.75% for 10 years. What FRA (i.e. "FRA?x?") do you wish to build for this client? Will your client enter as the short or as the long?

My answer so far is: enter ? x ?, at 2.75% as long for an amount of 1,500,000$

The only thing I don't understand is what periods of time to put instead of question marks. I uploaded an example from the class presentation and a formula for FRA in case it would be helpful. I would be really grateful if you would help me with this one, because I am not even sure I need to use these resources.

* The short [i.e. me) is losing here. as he is forced to . lend at3.50% when he could havedOne so at ExerC I39 4.75% in the market. The short pays the long. * Settlement amount calculation: -. Interest rate difference: 415% 3.50% = 1.25% -~ Borrowing length: 14 - 5 = 9 months ., Discount rate: 4.26% .. Interest differential: 250.000 x 1.25% at 9:12 = $2368.75 . Present value: 2,343.?5; [1 + 415% K 9!12}:$2,263.13 Formula and Calculation for a Forward Rate Agreement (FRA) (R - FRA) x NP x P 1 FRAP = X Y 1+ R x () where: FRAP = FRA payment FRA = Forward rate agreement rate, or fixed interest rate that will be paid R = Reference, or floating interest rate used in the contract NP = Notional principal, or amount of the loan that interest is applied to P = Period, or number of days in the contract period Y = Number of days in the year based on the correct day-count convention for the contract