Since SR

Question

Since SR < AR,then

Quizplus · Accepted Answer

Since the implied interest rate implied by the forward rate agreement (FRA) is less than the actual interest rate, it implies that interest rates are expected to decline. In this scenario, ABC Bank entered into the FRA with XYZ Bank to protect against a potential decline in interest rates. If interest rates do decrease, ABC Bank will benefit, and XYZ Bank will incur a loss. Therefore, XYZ Bank is required to pay ABC Bank a cash settlement at the beginning of the 91-day FRA period.