Forward Rate Agreement, You are a financial risk manager at

Forward Rate Agreement

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Reference no: EM134040284

Problem Set 1. (Forward Rate Agreement)

You are a financial risk manager at Goldman Sachs, responsible for hedging interest rate risks. It is January 31 st, 2020 and you enter into a FRA with Morgan Stanley's rates division. In this forward rate agreement, you will pay the LIBOR rate on $10 million to Morgan Stanley and receive a fixed 7% rate (annualized rate) on the same notional principal amount ($10 million) for a six-month loan period beginning in 18 months. Now it is July 31st, 2021, you just called the Goldman Sacks' interest rates desk and they quoted you the LIBOR rate which is 6%.

(1) What is the dollar amount of payment on this settlement date (July 3 1 st, 2021)?

(2) Who pays who on this settlement date? You (on behalf of Goldman Sachs) write a check to Morgan Stanley, or they write a check to Goldman?

(3) What was the purpose for you (on behalf of Goldman Sachs) entering this FRA on January 3 1 st, 2020? Was this for interest rate hedging for Goldman Sachs borrowing or lending money? Please explain your reasoning.

Reference no: EM134040284

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