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There are 2 similar questions in BPP most recent work book:
281. FRA is 3-6, 3.2%-2.7% spread. 10 million loan, actual interest rate is 3%.
According to the answer, FRA fixes interest at the upper end of the spread 3.2%
Hence the payment to financial institution is 5,000.However, question #4, in the practice exam #4, similar question
terms are FRA 3-9, 3.00%-3.20% spread, actual interest 3.50%, also 10 million loan.
But this time according to the answer the FRA guarantees a net interest receipt of 3.0% (the lower end of the spread).Basically, the only logical solution I came to is to use the first interest rate in the spread?
Please tell me if I am correct?
p.s I watch all the lectures and there is no such examples in the notes.
Thank you, your help is appreciated.
Of course there is an example in the notes and also I do explain in the lectures the reason for the spread!!
The lower rate is always for depositing money and the higher rate is always for borrowing money (the bank profits from the difference).
Your first question is an example borrowing money and your second question is an example depositing money.
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