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Suppose that you enter into an FRA that is designed to ensure you will receive a...

Suppose that you enter into an FRA that is designed to ensure you will receive a fixed rate of 5% on a principal of $100 million for a six-month period starting in two years. If three-month LIBOR proves to be 5.5% for the six-month period, what is the cash flow that is settled at the two-year point? Would this be a cash inflow or an outflow to you at the two-year point? *note: all interest rates here are expressed with semi-annual compounding. Choose from the following options

$243,309; cash inflow

$250,000; cash inflow

-$243,309; cash outflow

-$250,000; cash outflow

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Answer #1

As rates have increased FRA buyer will benefit hence cash inflow to you will be =(5.5%-5%)/2*100*1/(1+5.5%/2)=243309 cash inflow

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