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:

GABA

Gamma-Aminobutyric Acid, a neurotransmitter in the brain that is primarily involved in inhibiting neural activity.

Alcohol

A psychoactive substance commonly found in beverages such as beer, wine, and spirits, known for its intoxicating effects.

Nervous System

The network of nerve cells and fibers that transmits nerve impulses between parts of the body, responsible for regulating and coordinating body activities.

Endorphins

Neurochemicals in the brain that act as natural painkillers and also boost pleasure, creating feelings of well-being.