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. Which one of following statements is correct?     Group of answer choices To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.   To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.     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     Without the FRA, the bank will lose if the market interest rate drops at the end of three months.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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. Which one of following statements is correct?

 

 

Group of answer choices
To hedge the risk caused by maturity mismatch, the bank could take the buyer’s position if it uses the Euro-Dollar Interest Rate Futures instead.

 

To hedge the loss caused by maturity mismatch, the bank should be a seller of the FRA.


 

 

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


 

 

Without the FRA, the bank will lose if the market interest rate drops at the end of three months. 

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