If a dealer needs to hedge an over-lent 3x6 position against 1MM dates for which the FRA is quoted 1.30-1.34% and futures at 98.64, which would be cheapest for him (ignoring margin costs on futures positions) to cover his gap?
A) FRA
B) Futures
C) No difference
D) Too little information to decide

Question

Quizplus · Accepted Answer

The FRA is quoted at 1.30-1.34%, which implies a lower interest rate cost compared to the futures rate of 1.36% (100 - 98.64). Therefore, the FRA would be cheaper for hedging.

If a Dealer Needs to Hedge an Over-Lent 3x6 Position