FRA Short Position (Clarification)

CFA Level I
#1

Good day guys,

I’ve actually been here regularly as a spectator on some general topics which helped me clear some stuff. However, I need some clarification whether this statement holds true:

“A company that intends to lend funds in 30 days could take the short position in an FRA, receiving payment if future 90 day LIBOR (and its borrowing costs) increases, and making payment if future 90 day LIBOR decreases.” -Schweser notes June 2015, Derivatives, Page 181

It must be true, but can someone help me in finding out how? Say the FRA rate was 8% and LIBOR decreased to 7%, a 1% payoff is realised, correct?

#2

Correct.

I wrote an article on FRAs that may be of some help here: http://financialexamhelp123.com/fras/

#3

There’s just something off with that Schweser statement, since tutorial videos tell me the reverse (make payment when LIBOR increases). Overall, I get it. Thanks for the info.

#4

It is the opposite, when interest rate rises, the short makes payment to the long, and vice versa.

#5

Thanks!

#6

You are welcome…