Solution-Period between six months

Period between six months

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Reference no: EM133058246

A bank can borrow or lend at LIBOR. Suppose that the six-month rate is 2.50% and the nine-month rate is 3.00%. If the rate that can be locked in for the period between six months and nine months using an FRA is 3.50%, which of the following statements is true?

(All rates are continuously compounded.)

Select one:

The arbitrage-free FRA rate covering the period from 6 to 9 months is 4.0%. The bank can make an arbitrage profit by investing at the FRA rate, borrowing for 9 months at 3.0% and investing for 6 months at 2.5%.

The arbitrage-free FRA rate covering the period from 6 months to 9 months is 4.0%. The bank can make arbitrage profit by borrowing against the quoted FRA rate, borrowing for 6 months at 2.50% and investing for 9 months at 3.0%.

The arbitrage-free FRA rate is 2.75% but there is no arbitrage profit that can be made because the interest rates are in equilibrium.

Reference no: EM133058246

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Period between six months

Reference no: EM133058246

Reference no: EM133058246

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