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Problem:

An institutional investor speculates the rise of interest rate in twelve months' time. It therefore enters today with a local bank a twelve-month forward rate agreement to borrow Eurodollar for six months at 1.96% at contract expiration, with a notional principal of USD10 million.

Required:

Question: Calculate the institutional investor's payment to or receipt from the local bank on the contract expiry date with respect to the forward rate agreement if the interest rate on 6-month LIBOR twelve months later were 4.00%

Note: Please provide reasons to support your answer.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91174423

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