CFA Practice Question
If the forward contract rate is lower than the underlying rate at expiration, ______
B. the FRA lender pays.
A. the FRA borrower pays.
B. the FRA lender pays.
Correct Answer: B
User Contributed Comments 7
| User | Comment |
|---|---|
| cong | The FRA buyer profits from a downward movement in the underlying rate. |
| jpducros | If contract rate is lower than the underlying rate, then the rate have increased. If so, then the long wins and the short have to pay at expiration. Normally in a transaction between a bank and a company, the bank is the lender and the company is the borrower, because the company generally wants to lock in its borrowing rate rather than be at the mercy of the market. Here the bank, ie the lender have to pay. Cong, I think your statement is wrong. |
| poomie83 | Cong you are wrong. Buyer (borrower)benefits from increase in underlying rates Seller (lender) benefits from decrease |
| gill15 | Poomie is right |
| dbedford | I just thought to my self who is it going to suck more for if the contract rate is less than reality, and that would be the seller because they could gotten the higher rate |
| ashish100 | cong you're a bum |
| mtsimone | Buyer receives float. You're long an FRA because you're buying Libor. You can't be long something fixed. Hence, at settlement you get 'Float – Fixed', i.e., 'what you got' – 'what you gave for the FRA'. If float/Libor increases, you bought the FRA at a bargain. I know this is a simpleton way to think about it, but then that's how I got it to stick. |