A Bank Bought a "Three Against Six" $5,000,000 FRA for a Three-Month

question 22

Multiple Choice

A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5.0%. Assume that three months from today the settlement rate is 5.25%. Who pays whom? How much? When? The actual number of days in the FRA is 90.

• A)The bank pays $3,0084.52 at the end of 3 months
• B)The bank pays $3,0084.52 at the end of 6 months
• C)The counterparty pays $3,0084.52 at the end of 3 months
• D)The counterparty pays $3,0084.52 at the end of 6 months

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Definitions:

Wholly Owned Subsidiaries

Companies that are completely owned by another company, which holds 100% of the subsidiary's shares.

International Business

The exchange of goods, services, technology, and capital across national borders, involving transactions that plan for global outreach and operational strategies.

Local Operation

The activities, functions, or processes that are carried out within a specific geographical location or community.

Multinational Corporation

A company that operates in multiple countries, managing production or delivering services in more than one country beyond its home country.