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Hi Mr moffat
The company wants to deposit and hedge using fra.
Current libor 4 %
Deposit in commercial paper which is libor plus 0.6%
Fra 3.45 ( this fra is 0.60% over libor from the commercial paper)
In actual the libor came to be 3.5 when the fra came into effect .
And this is the one being compared with 3.45 as to net we owe the bank. ( 3.5 to 3.45)
I am confused why didn’t we add 0.6% to 3.5 libor and then compared against 3.45.
After all 3.45 fra includes the 0.60 as stated in question. To have like with like
In practice it really depends who the FRA is taken out with. However, given that it is likely to be taken out with a separate institution, then the receipt or payment is calculated by comparing the FRA rate with LIBOR at the date the loan starts.
It is a bit difficult for me to follow the figures you have given, as you have typed them – if they are from a past exam question or from a question in the current edition of the BPP Revision Kit then say which question – then I can explain more precisely 🙂
(I assume you have watched my free lectures on the management of interest rate risk?)
I targeted the book first as it is fast to go through if anything that I can’t grasp then I rescue your lectures.
For example Currency futures. Your lecture was awesome.
Regarding the question in this post. I understood it on my own after pasting the question here. You could close this thread. Thank you
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