Answer to Question #339976 in Financial Math for Meden

Question

The treasurer of Company ABC expects to receive a cash inflow of $18,000,000 in 90 days. The treasurer expects short-term interest rates to fall during the next 90 days. To hedge against this risk, the treasurer decides to use an FRA that expires in 90 days and is based on 90-day LIBOR. The FRA is quoted at 6%. At expiration, LIBOR is 4.8%. Assume that the notional principal on the contract is $18,000,000.

i. Indicate whether the treasurer should take a long or short position to hedge interest rate risk.

ii. Using the appropriate terminology, identify the type of FRA used here.

iii. Calculate the gain or loss to Company ABC as a consequence of entering the FRA

Answer 1

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