A bank agrees to buy from a customer a "three against six" FRA at the market rate for such instruments. How can the bank hedge this obligation?
A) Go long a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate financed by going short a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
B) Go short a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate; go long a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
C) Borrow a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
D) None of the above
Correct Answer:
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