You borrow money at Libor with a floating-rate note for one year with two semi-annual payments.What position do you need to add to this note to fix the cost of borrowing for the entire year?
A)Sell a $6 \times 12$
FRa)
B)Buy a $6 \times 12$
FRA)
C)Buy a one-year zero-coupon bond and short a 1.5-year zero-coupon bond.
D)Buy a six-month zero-coupon bond and short a one-year zero-coupon bond.

Question

Quizplus · Accepted Answer

To fix the cost of borrowing for the entire year when you have a floating-rate note, you would buy a $6 \times 12$ Forward Rate Agreement (FRA). This agreement allows you to lock in an interest rate for a loan or deposit that will start in 6 months and last for 6 months (hence, covering the second half of the year). This effectively fixes your borrowing cost for the entire year by hedging against the risk of rising interest rates for the second payment.

You Borrow Money at Libor with a Floating-Rate Note for One