I believe the answer should be C on this once because the market rate is 7.04% and the contract rate is 6.95%. The long side of the FRA wins in this case, because he is essentially borrowing for below market rates, so he should receive payment from the short. Schweser says the answer is A. I’m correct right?
he wants to borrow at 6.95%, and since we calculate the “real” contract rate of 7.04%, it has to be off-market b/c if it was “on” market he would have to borrow at 7.04%. So it’s valuable to borrow at the lower contract rate of 6.95% than the 7.04%, so he has to PAY for this.