A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Assume 360 days a year, which one of the following statements is incorrect?
A bank is considering using a “three against six” $2,000,000 FRA to cover its potential loss. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a six-month Eurodollar loan and having accepted a three-month Eurodollar deposit. The agreement rate with the buyer is 4.6%. There are actually 92 days in the three-month FRA period. Assume 360 days a year, which one of the following statements is incorrect?
If the settlement rate is 4.8% three months from today, then the buyer pays the seller.
If the settlement rate is 4.8% three months from today, then the FRA is worth $1009.84
To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.
Without the FRA, the bank will lose if the market interest rate drops at the end of three months.
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