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I am confused when I saw “6-9 FRA 2.8%-3.1%” in the question, which rate should I use for the calculation and what the spread means here?
Thank you in advance
In depends whether in the question they are depositing money or borrowing money. The lower rate is the rate on depositing and the higher rate is the rate on borrowing.
This is all explained in my free lectures on the management of interest rate risk.
Hi Sir, thank you for explaining
But in BPP Mock examination 4, question 4
KEW Co is planning an investment of $10 million for a six-month period starting in three months’ time. KEW Co is worried about interest rates falling and hedges the risk using an appropriate FRA as follows:
6-9 FRA 2.80%-3.10%
3-9 FRA 3.00%-3.20%Assume that in three month’s time, interest rates are 3.50%.
The company is about to invest, shouldn’t they borrow the money from the bank?
/////////I think I understand now, the company is worried about interest rates falling, only when they intend to deposit money, they will worry about the decreasing interest rate.
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