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Hi John, please check if I am right,
under FRAs in the question as stated above, FRA rate is 4.82% and if interest rates increase by 0.9%. interest rate increase to 4.99%.
i arrived at the answer as 0.9%*12/3=0.036
1.036*4.82=4.99%. is it ok?Secondly, if interest rates decrease by 0.9% interest rate decrease from 4.82% to 3.19% how the 3.19% was arrived at? thanks i
The FRA rate does not change – the whole point of an FRA is to fix the interest (regardless of what happens to the actual interest rate).
From the question, the current interest rate is 4.09%, so the actual interest rate will change to either 4.09 + 0.9 = 4.99%, or to 4.09 – 0.9 = 3.19%
thanks,i got this one.by the way, the question also says, Awan co can invest funds at the relevant inter-bank less 20 basis point. does this statement affect FRA rate of 4.82% as I can see from the answer to the question the effective annual interest rate is 4.62% instead of 4.82%. is there any thing i am missing? thanks
If the can invest at 20 basis points less than LIBOR, then it means they get interest 0.20% less than LIBOR.
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