John Woodstock works at RedGreen Corporation. He s expecting a receipt of $50,000,000 in 2 months time and the deposit will not be required for a period of 6 months from receipt at which time the cash will be required for capital investment. Woodstock notes that LIBOR is currently 6% but Woodstock believes that macro-economic conditions are currently such that this will reduce over the 8 months in question, particularly within the next quarter, to a level he anticipates to be 5.25%. Woodstock sells a 2 x 8 FRA with an interest rate of 5.7%. LIBOR at the date the cash is received is 5.5%. Which of the following best describes that resultant cash flows? A)$50,000 in RedGreen’s favor B) $50,000 against RedGreen C) $48,614.49in RedGreen’s favor D) $48,661.80in RedGreen’s favor

D? the second paragraph is misleading

heha168 Wrote: ------------------------------------------------------- > D? > > the second paragraph is misleading Good catch heha! You should show the folks in here the calculations…

buying FRA = receive float, pay fixed selling FRA = receive fixed, pay float since fixed>float, B is out A is out because it’s not discounted 2x8 ===> discounted for 6months My calculation: FV=50000 I/Y=5.5/2=2.75 N=1 CPT PV=48661 good question

heha168 Wrote: ------------------------------------------------------- > buying FRA = receive float, pay fixed > selling FRA = receive fixed, pay float > since fixed>float, B is out > A is out because it’s not discounted > 2x8 ===> discounted for 6months > My calculation: FV=50000 I/Y=5.5/2=2.75 N=1 CPT > PV=48661 > > good question Nice

Directly apply equation numerator: 50M * (5.7%-5.5%)*180/360 denomenator: 1+ 5.5%/2 calculate: 48661.8 He is seller of FRA and interest falls, so he gains.