Use the Zero-Coupon Bond Prices Given in the Following Table

question 9

Multiple Choice

Use the zero-coupon bond prices given in the following table to answer the questions that follow.
-Consider a three-year swap receiving floating paying fixed with principal of $10 million,paying a fixed rate of 2 percent per year paid yearly,and receiving the one-year floating spot rate yearly.How would one synthetically construct the swaps payoff at time 3 using FRAs and zero-coupon bonds? (Hint: use the answer to question 11. )

• A) long a $10 million notional FRA maturing at time 3 and long 22,222 zero-coupon bonds maturity at time 3
• B) long a $10 million notional FRA maturing at time 3 and long 20,000 zero-coupon bonds maturity at time 3
• C) short a $10 million notional FRA maturing at time 3 and short 22,222 zero-coupon bonds maturity at time 3
• D) short a $10 million notional FRA maturing at time 3 and short 20,000 zero-coupon bonds maturity at time 3
• E) long a $10 million notional FRA maturing at time 3 and short 22,222 zero-coupon bonds maturity at time 3

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Definitions:

Income

The amount of money received on a regular basis from work, property, business, investment, or welfare payments.

Price

The amount of money required to purchase a good or service, determined by various factors including supply, demand, cost of production, and market conditions.

Utility Function

A representation in economic theory of how a consumer ranks different bundles of goods based on the level of satisfaction (utility) they provide.

Income

Money that an individual or business receives in exchange for providing a good or service or through investing capital.