You wish to create a synthetic forward rate agreement in which you would lock in a return between 150 and 310 days.The price of a 150-day zero coupon bond is 0.9823 and the price of 310-day zero coupon bond is 0.9634.What are the transactions used to create this instrument?
A) Borrow one 150-day bond and invest in 1.02 of the 310-day bonds
B) Borrow two 150-day bonds and invest in 0.98 of the 310-day bonds
C) Lend one of the 150-day bonds and borrow 1.02 of the 310-day bonds
D) Lend two of the 150-day bonds and borrow 0.98 of the 310-day bonds

Question

Quizplus · Accepted Answer

CTo create a synthetic forward rate agreement that locks in a return between 150 and 310 days, you would need to lend (sell) the 150-day bond and borrow (buy) more of the 310-day bond to cover the longer period. The correct transactions are those that involve lending the shorter duration bond and borrowing the longer duration bond to capitalize on the interest rate differences over the specified period. Option A and C correctly represent these actions, with slight variations in the amounts to adjust for the price differences between the two bonds.

You Wish to Create a Synthetic Forward Rate Agreement in Which