Suppose you enter into a Forward Rate Agreement that will receive 5% on a principal...
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Suppose you enter into a Forward Rate Agreement that will receive 5% on a principal of $100m for one period starting in four periods. Four periods later, the one-period interest rate turns out to be 3%. If the contract is settled in period five, how much will you pay or receive? (We are assuming the settlement takes place in period give, although in realityFRA will be settled in period four by taking the present value of the cash payment in period 5.)
| A. | Receive $2 million | |
| B. | Pay $2 million | |
| C. | Pay $5 million | |
| D. | Receive $7 million |
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