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Wells Fargo believes that LIBOR rates will increase, and Bank of America believes LIBOR rates will...

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Finance

Wells Fargo believes that LIBOR rates will increase, and Bank ofAmerica believes LIBOR rates will decrease. Which bank should buyand sell an FRA?

They set an agreement rate at 3.3% for three-month LIBOR. Thesettlement date will occur in seven months. The notional amount is$35,000,000. Assume every month has 30 days. If the settlement rateends up at 4.5%, what has the winner earned (remember an FRA issettled not at the end of the contract period of the FRA, but whenthe settlement rate is determined)?

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4.2 Ratings (590 Votes)
Fargo believes that interest rate will increase so it will want Fixed interest rate so that increase in interest rate does not effect it So it should buy FRA Bank of America think that interest rate will    See Answer
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Wells Fargo believes that LIBOR rates will increase, and Bank ofAmerica believes LIBOR rates will decrease. Which bank should buyand sell an FRA?They set an agreement rate at 3.3% for three-month LIBOR. Thesettlement date will occur in seven months. The notional amount is$35,000,000. Assume every month has 30 days. If the settlement rateends up at 4.5%, what has the winner earned (remember an FRA issettled not at the end of the contract period of the FRA, but whenthe settlement rate is determined)?

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