A Bank Agrees to Buy from a Customer a "Three

question 46

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 above

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Definitions:

Average Fixed Cost

The total fixed costs of production divided by the quantity of output produced, indicating the per unit fixed cost.

Fixed Costs

Costs that do not vary with the level of output, such as rent, salaries, and insurance premiums.

Cakes

Baked desserts typically made from ingredients like flour, sugar, and eggs.

Average Product

The output per unit of input, calculated by dividing total product by the number of units of input, used to measure productivity.