A 3 * 9 FRA has an agreement rate of 4.75%. You believe 6M libor in 3M will be 5.125%. You decide to take a speculative position in a FRA with a $1,000,000 notional value. There are 183 days in the FRA period. Determine whether you should buy or sell the FRA and what your expected profit will be if your forecast is correct about the 6M Libor rate.
Sell FRA Now. After 3 months, receive the notional amount of $1m from the buyer of the FRA and pay interst + principle at the end of 9 months. Total payment = ...
Solution Summary
Determine whether you should buy or sell the FRA and what your expected profit will be if your forecast is correct about the 6M Libor rate.
$2.19
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