A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5.0%. Assume that three months from today the settlement rate is 5.25%. Who pays whom? How much? When? The actual number of days in the FRA is 90.
A) The bank pays $3,0084.52 at the end of 3 months
B) The bank pays $3,0084.52 at the end of 6 months
C) The counterparty pays $3,0084.52 at the end of 3 months
D) The counterparty pays $3,0084.52 at the end of 6 months
Correct Answer:
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