C is correct in the following. I want to understand FRA concept. Here is my understanding. For FRA, one is floater(Let us say LIBOR) and other one is fixed payer. When they come to agreement a notional principle is choosen. But nothing changes hands. The LIBOR rate at the time of agreement is not all does not matter. Is it correct? If they are in contract for 3 years, let us say one year is over. So, the rate is decided at that time. So it is known who receives payment at the end of year ONE But still nobody receives anything at end of first year. Am I correct? At the end of second year the real transaction of money happens? Is it right? Appreciate any link on basics on FRA topic with a simple example ------------------------- Two parties enter a three-year, plain-vanilla interest rate swap agreement to exchange the LIBOR rate for a 10 percent fixed rate on $10 million. LIBOR is 11 percent now, 12 percent at the end of the first year, and 9 percent at the end of the second year. If payments are in arrears, which of the following characterizes the net cash flow to be received by the fixed-rate payer? A. $100,000 at the end of year 2. B. $100,000 at the end of year 3. C. $200,000 at the end of year 2. D. $200,000 at the end of year 3.
I think the rate for an FRA gets decided at the end of the contract. In your case, the LIBOR rate at the end of the third yr will be compared to the one on the contract.
Year 0 1 2 3 LIBOR(%) 11 12 9 Fixed(%) 10 10 10 Diff(%) 1 2 -1 Pay(100k) 0 1 2 -1
I guess white space is ignored… Year----------0-----1-----2----3 LIBOR(%)—11—12----9 Fixed(%)----10—10----10 Diff(%)-------1-----2-----1 Pay(100k)— 0----1-----2—(1)