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Explain the forward rate agreement

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Reference no: EM132953040

A bank made a 6-month $50 million loan at 5% funded by a one-year wholesale deposit at 4%. To protect against interest rate changes when rolling over the loan in 6 months, the bank decides to hedge using a forward rate agreement (FRA).

1. Explain how you would hedge using FRAs to maintain the current spread.

2. Show the net spread in dollars if interest rates are 3%, 5% and 7% at maturity. Use 184 days for 6-month FRAs.

Reference no: EM132953040

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