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%

---

Definitions:

After-tax Returns

The profit realized from an investment after all applicable taxes have been subtracted.

Portfolio Turnover

A measure of how frequently investments are bought and sold within a portfolio during a specified period of time.

Malkiel's Study

An academic research work that analyzes market trends, investor behavior, and the efficiency of financial markets, particularly known for supporting the random walk hypothesis.

Subsequent-year Period

A timeframe that follows the current year, used in forecasting and planning for future financial or operational activity.