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Citibank need to borrow $1 million for 6 months starting in 3 years. Citibank is concerned...

Citibank need to borrow $1 million for 6 months starting in 3 years. Citibank is concerned about the interest rate would like to lock in the interest rate it pays by going long an FRA with Bank of America. The FRA specifies that Citibank will borrow at a fixed rate of 0.04 for 6 months on $1 million in 3 years. If the 6 months LIBOR rate proves to be 0.02. Then to settle the FRA, what is the cash flow to Citibank at the end of 3 years? Please be careful with the sign (positive/negative) of your answer and keep your answer to 2 decimal points.

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Answer #1

Citibank needs to borrow it is afraid of interest rate rising

So it has entered into an FRA that will give positive payoff when interest rate rise

and negative payoff when interest rate falls

Ciribank will have to pay 9900.99 dollars at the end of 3 years

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