You are short an $3 \times 6$ FRA and short a eurodollar futures contract expiring in 3 months. Assume the fixed rate in the FRA is the same as the rate locked in via the eurodollar futures contract. If interest rates jump up by 100 basis points,
A) You will lose money on both the FRA and the eurodollar futures.
B) You make money on the FRA but lose on the eurodollar futures.
C) You make money on both the FRA and the eurodollar futures.
D) You lose money on the FRA but make money on the eurodollar futures.

Question

Quizplus · Accepted Answer

Being short on an FRA means you've agreed to pay a fixed rate and receive a floating rate. If interest rates rise, the floating rate you receive will be higher, benefiting you. Being short on a eurodollar futures contract means you've agreed to sell interest rate exposure at a set rate; if rates rise, the value of the contract falls, and you lose because you're committed to selling at a now lower rate than the market.

You Are Short An 3×63 \times 63×6 FRA and Short a Eurodollar Futures Contract Expiring in 3

You Are Short An $3 \times 6$ FRA and Short a Eurodollar Futures Contract Expiring in 3