What is a forward rate agreement

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Reference no: EM132757409

Problem 1: What is a Forward Rate Agreement (FRA)? Explain what the key dates of an FRA are.

Provide a solution to the following problem:

A bank sells a "three against six" $5,000,000 Forward Rate Agreement for a three-month period beginning three months from today and ending six months from today. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is 4.5 %. There are actually 91 days in the three-month FRA period. Assume that three months from today the settlement rate is 6.0 %.

Problem 2: Determine how much the FRA is worth and who pays who - the buyer pays the seller or the seller pays the buyer?

Reference no: EM132757409

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