A Company Has Entered into a Forward Rate Agreement with a Corporate

question 90

Multiple Choice

A company has entered into a forward rate agreement with a corporate borrower.The following terms and conditions apply to the contract:
Notional principal:$350 000
Contract rate:12.65% per annum
Reference rate:13.10% per annum
FRA period:180 days
Who will be responsible for payment of the settlement amount?

• A) The company
• B) Neither party-no settlement amount is payable
• C) The bank
• D) The clearing house

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Definitions:

Long-Run Supply Function

A relationship indicating the quantity of a good or service that producers are willing to make available in the market over a long period, considering all inputs are variable.

Long-Run Total Cost

The sum of all costs incurred by a firm in the production of goods or services when all inputs are considered variable in the long term.

Profit Maximization

The process of determining the best output and pricing levels to achieve the most profit.

Production Function

An equation in mathematics that outlines how inputs correlate with the greatest output achievable from those inputs.