You Have Entered into a FRA with a Notional Amount

question 4

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:

Petty Cash Fund

A minor sum of money maintained in reserve for completing instant transactions for various minor costs.

Journalize

Recording financial transactions in the appropriate book of accounts, ensuring they are officially documented.

Replenishment

The process of filling up or restocking inventory or supplies to maintain required levels.

Petty Cash Fund

A small amount of cash kept on hand for minor, impromptu expenses.