A Bank Agrees to Buy from a Customer a "Three

question 67

Multiple Choice

A bank agrees to buy from a customer a "three against six" FRA at the market rate for such instruments.How can the bank hedge this obligation?

• A)Go long a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate financed by going short a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
• B)Go short a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate; go long a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
• C)Borrow a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
• D)none of the options

---

Definitions:

Utility

In economics, utility refers to the satisfaction or pleasure derived by consumers from consuming goods or services.

Efficient

An attribute of a market or process where resources are allocated in the most effective way, yielding the maximum benefit for a given set of resources.

Competitive Equilibrium

Competitive Equilibrium is a state where supply equals demand, market resources are efficiently allocated, and no participant in the market can influence the price of goods or services.

Price Adjustment

The process by which prices of goods and services are altered to respond to changes in the market conditions.