269 450 242 140 840 1b Suppose that in order to hedge intere

2.69%

4.50%

2.42%

1.40%

8.40%

1b) Suppose that in order to hedge interest rate risk on your borrowing, you enter into an FRA that will guarantee a 5.4% effective annual interest rate for 1 year on $1,000,000. On the date you borrow the $1,000,000, the actual interest rate is 6.0%. To settle the FRA on the date the loan is initiated, you would...

receive $5,660.

receive $6,000.

pay $5,660.

pay $6,000.

Solution

Correct answer is > a. receive $5,660

.

We will make profit on this transaction:

Receipt:

(Actual rate – Effective borrowed rate) x Loan/(1+Actual rate)

=(6% - 5.4%) x 1000000/(1+6%)

=$5,660