You Have Borrowed at 3-Month LIBOR+50

question 22

Multiple Choice

You have borrowed at 3-month LIBOR+50. LIBOR for the loan will be re-fixed in exactly one month. The market is quoting: 1x3 USD FRA            0.42-45% 1x4 USD FRA            0.54-58% 1x5 USD FRA            0.57-62% To hedge the next LIBOR fixing, you should:

• A) Sell a 1x3 FRA at 0.42%
• B) Buy a 1x3 FRA at 0.45%
• C) Buy a 1x4 FRA at 0.58%
• D) Sell a 1x4 FRA at 0.54%

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Definitions:

MR = MC

This equation represents the profit-maximizing condition in economics where marginal revenue (MR) equals marginal cost (MC), often used to determine the optimal level of output.

Competitive Price-searcher

A market participant who actively compares prices among competitors to find the best possible deal, often in markets with imperfect competition.

Short-run Losses

Financial losses that a firm experiences within a limited time period, usually due to fixed costs and market conditions.

Industry Entry

The process or act of starting a new venture or entering a market as a new competitor.