CFA Practice Question

There are 206 practice questions for this study session.

CFA Practice Question

A European bank wants to short a 1x3 forward rate agreement on Euribor. A dealer provides the bank with a quote of 1.75 percent. The bank agrees to enter the FRA with the dealer. At contract maturity, what Euribor rate would most likely result in the European bank receiving a payment from the dealer?
A. 60-day Euribor at 1.70%
B. 60-day Euribor at 1.80%
C. 90-day Euribor at 1.65%
Explanation: The bank is short the FRA and would benefit from a decrease in the 60-day Euribor rate.

User Contributed Comments 5

User Comment
dtello can someone explain me please? :)
shumwaya seconded
fobucina The buyer of an FRA agreement generally agrees to pay a fixed rate in exchange for a variable rate. Therefore, as a seller of the FRA agreement, you are receiving the fixed rate and are mandated to pay the variable rate (which is determined by Euribor in this case). The situation in which YOU do NOT pay (major key, these contracts are netted at expiration) the buyer of the FRA agreement is when your obligated variable rate < fixed rate.
1a2a Well sure fobucina but that does not explain why the 60-day beats out the 90-day, which is what I'm hung up on.
Mhmdjamal @1a2a :FRA agreement is 1*3
if it was 1*4 you will be correct C is the right answer
You need to log in first to add your comment.