I do not agree with Schweser’s answer on this questions and their explanation is terrible. Suppose a forward rate agreement (FRA) calls for the exchange of six-month London Interbank Offered Rate (LIBOR) two years from now for a payment of a fixed rate of interest of 6%. Which of the following structures is equivalent to this FRA? A long: A) call and a short put on LIBOR with a strike rate of 6% and two years to expiration. B) put and a short call on LIBOR with a strike rate of 6% and two years to expiration. C) call on LIBOR with a strike rate of 6% and eighteen months to expiration.

This is a receive floating, pay fixed. When you need to receive floating - this would happen only when Interest Rates increase. So Long Call, Short Put. Term should be 2 years. So Choice A.

C (the 1st pmt is known in the beinning so the remaning 3 pmts are a CALL on LIBOR)?

you are correct…I was wrong…I read the FRA Wrong I thought you would receive fixed and pay floating…which would make B valid…

swaptiongamma Wrote: ------------------------------------------------------- > C (the 1st pmt is known in the beinning so the > remaning 3 pmts are a CALL on LIBOR)? there is only one payment in the FRA stated above

A