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 financial instrument allows you to lock in an interest rate for a loan or deposit that starts in six months and ends in twelve months, effectively hedging against the risk of rising interest rates.

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