Find the Rate on a Pure Discount Loan Hedged with a Long

question 12

Multiple Choice

Find the rate on a pure discount loan hedged with a long FRA if the loan is for $10 million and matures in 30 days,the FRA is 30-day LIBOR,the fixed rate on the FRA is 4 percent,and LIBOR at the time the loan is taken out is 5 percent.

• A)4.87 percent
• B)0.25 percent
• C)5.18 percent
• D)4.13 percent
• E)2.04 percent

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Definitions:

Price Elasticity

An evaluation of demand sensitivity to price variations for a given item.

Mad Cow Disease

A fatal neurodegenerative disease in cattle that can be transmitted to humans, causing a variant of Creutzfeldt-Jakob Disease.

Ground Beef

Beef that has been finely chopped by a meat grinder or a similar tool, often used in cooking various dishes.

Demand Elasticity

An indicator of the responsiveness of the quantity demanded of a product to changes in its price, where an elasticity greater than one signifies heightened sensitivity.