# swaps-FRA

The floating-rate payer in a simple interest-rate swap has a position that is equivalent to: A) a series of short FRAs. B) issuing a floating-rate bond and a series of long FRAs. C) a series of long forward rate agreements (FRAs).

I hate this section…B

A

B?

A

Interest expense will increase by \$24 million (\$240 million × 0.10) to \$46 million. Therefore times interest earned decreases to 1.76 times (81 / 46). Recall that when capitalizing operating leases interest expense is calculated as the present value of the lease obligations multiplied by implied interest rate. The floating-rate payer in a simple interest-rate swap has a position that is equivalent to: A) a series of short FRAs. B) issuing a floating-rate bond and a series of long FRAs. C) a series of long forward rate agreements (FRAs). Your answer: B was incorrect. The correct answer was A) a series of short FRAs. The floating-rate payer has a liability/gain when rates increase/decrease above the fixed contract rate; the short position in an FRA has a liability/gain when rates increase/decrease above the contract rate. can anyone please explain why the ans would be A?

my reasoning was that if you’re a floating rate payer you lose out if rates go up (you pay a higher rate but get a fixed now lower rate) likewise if you are the short in a FRA you lose out if rates go up thus the two are one and the same

but even when u issue a floating rate bond, u lose if the interest go up, then why not option B

in answer B the long FRA will offset any losses due to an increase in interest rates therefore you won’t have the same exposure as being a floating rate payer in an interest rate swap If it said B) issue a floating rate bond then B would be correct

A) a series of short FRAs.

jp25 Wrote: ------------------------------------------------------- > can anyone please explain why the ans would be A? short FRA = pay floating, receive fixed, similar to being the floating payer in an interest rate swap the only problem with this answer is that the rates during the swap’s term are going to be identical whereas it’s unlikely that you’re going to lock in on a series of FRAs with identical fixed rates over the time period in question