A Forward Rate Agreement (FRA) Is a Contract Between Two

question 12

Multiple Choice

A forward rate agreement (FRA) is a contract between two banks

• A)that allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits.
• B)in which the buyer agrees to pay the seller the increased interest cost on a notional amount if interest rates fall below an agreed rate, and the seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate.
• C)that is structured to capture the maturity mismatch in standard-length Eurodeposits and credits.
• D)all of the above

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Definitions:

Interest Income

Earnings from investment in interest-bearing financial instruments, such as savings accounts, CDs, or bonds.

FMV

Fair Market Value (FMV) is the estimated price that an asset would sell for on the open market between a willing buyer and a willing seller.

Basis

The initial cost of an asset, adjusted for factors such as depreciation or improvements, used to calculate capital gains or losses for tax purposes.

Debt

Debt represents money borrowed by one party from another under the condition that it is to be repaid, usually with interest.