Question

In: Finance

The current agreement rate for a 3 against 9 FRA is 5% p.a. Based on your...

The current agreement rate for a 3 against 9 FRA is 5% p.a. Based on your analysis of the interest rate markets, you think that the 6-month LIBOR rate in 3 months' time is going to be 3%. If you want to make profit by trading FRAs, what would you do? Assuming the notional value is $1.5 million, and each month has exactly 30 days, how much profit can you make? Select one: a. None of the options b. Since you expect the actual interest rate to be lower than the agreement rate, you should buy a 3 against 9 FRA. The expected profit is $9,708.74 c. Since you expect the actual interest rate to be lower than the agreement rate, you should sell a 3 against 9 FRA. The expected profit is $14,778.33 d. Since you expect the actual interest rate to be lower than the agreement rate, you should buy a 3 against 9 FRA. The expected profit is $14,778.33 e. Since you expect the actual interest rate to be lower than the agreement rate, you should sell a 3 against 9 FRA. The expected profit is $9,708.74

Solutions

Expert Solution

Since you expect the actual interest rate to be lower than the agreement rate, you should sell a 3 against 9 FRA. The expected profit is $14,778.33

=1.5*10^6*(5%-3%)*0.5/(1+3%*1/2)
=14778.32512


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