F company have a surplus of $ 1 m from 1 st may for 3 month which will need to be deposited to earn additional interest. The manger has seen the inverted interest rate yield curve in the financial press so is considering using a 3 v6 fra quoted at 5%- 5.6% to hedge the interest rate risk exposure ?
What is the payment /receipt payable on the fra if the reference interest rate move to 5.5% om the 1 st of may?
I dont understand fra quoted 5%- 5.6% which rate i will use for deposit
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f company
8y ago#1Always, the lower rate is the rate the bank pays on deposits, and the higher rate is the rate they charge on borrowings. (The difference is because the bank makes a profit - they charge more when they lend money than they pay on deposits)
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