You Are Paying 1,00% Per Annum Paid Semi-Annually and Receiving

question 198

Multiple Choice

You are paying 1,00% per annum paid semi-annually and receiving 6-month LIBOR on a USD 10,000,000.00 interest rate swap with exactly two years to maturity. 6-month LIBOR for the next payment date is fixed today at 0.95%. How would you hedge the swap using FRAs? How to hedge an IRS with a strip of FRAs?

• A) buy a strip of 0x6, 6x12, 12x18 and 18x24 FRAs
• B) sell a strip of 0x6, 6x12, 12x18 and 18x24 FRAs
• C) buy a strip of 6x12, 12x18 and 18x24 FRAs
• D) sell a strip of 6x12, 12x18 and 18x24 FRAs

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Definitions:

Monopolistic Competition

A market structure characterized by many firms selling products that are similar but not identical, leading to competition based on product differentiation.

Pure Competition

A market structure characterized by a large number of small firms selling identical products, with no single firm able to control the market price.

Channels Of Distribution

Paths or routes through which goods and services flow from the producer or supplier to the consumer.

Pricing Constraint

Limitations or factors that affect how a company can price its products or services, such as cost, competition, and demand.