You take a 1 million 3-month Eurodollar deposit to finance a 1 million 6-month Eurodollar loan....

You take a 1 million 3-month Eurodollar deposit to finance a 1 million 6-month Eurodollar loan. You are worried about interest rate risk and you would like to use a FRA contract to hedge your risk exposure. The appropriate FRA contract you should consider is: Select one: a. Sell a 3 against 6 FRA on a notional amount of $1 million. b. Buy a 3 against 6 FRA on a notional amount of $1 million c. Buy a 3 against 3 FRA on a notional amount of $1 million d. Sell a 3 against 3 FRA on a notional amount of $1 million

Expert Solution

You take a 1 million 3-month Eurodollar deposit to finance a 1 million 6-month Eurodollar loan. Hence exposure is hedged for the first 3 months after 3 months you have interest rate risk exposure for 3 months.

You are a borrower and therefore you have afraid of nterest rate rising after 3 months

You should

b. Buy a 3 against 6 FRA on a notional principal of $ 1 million.

jeff jeffy answered 2 years ago

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