You Have Entered into a FRA with a Notional Amount

question 27

Multiple Choice

You have entered into a FRA with a notional amount of $100,000,000 which says that if 1-year LIBOR is greater than 5% then the bank will pay you and vice versa if the rate is less than 5%.At the end of the contract you find that 1-year LIBOR is 4.5%.What is the appropriate cash flow?

• A) the bank pays you $500,000
• B) you pay the bank $500,000
• C) the bank pays you 478,469
• D) you pay the bank 478,469

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Definitions:

Labor

The human effort, both physical and mental, that is used to produce goods and services.

Interest Rate

The percentage of a sum of money charged for its use, often expressed as an annual rate in the context of loans or savings.

Garden Gnomes

Are small decorative figurines of humanoid creatures, usually placed in gardens, believed to protect the area from evil.

Long-Run Equilibrium

A state in which all factors of production and costs are variable, leading to no economic profit for firms in perfectly competitive markets.