Calculate the outcome of the fra

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Reference no: EM132178330

Question - On 1st of January your CFO decides that 1 million Euros will be needed at 1st of April for a time span of three months, so you will be looking for a loan and a way to hedge the interest risk. Current interest rates are 5.5% and they are expected to go down, while inflation is expected to stay at 1%. Forward rate agreements for your kind of loan are offering 5.0% and you are interested in securing this rate for your future loan so you enter this contract for the notional amount.

1) State how would the FRA be denominated.

2) Calculate the outcome of the FRA, the expected interest cash flow, the effective cash flow and effective interest rate of the strategy, if at April 1st the interest rates have moved to:

a) 4.5%

b) 6.0%

3) Determine at what spot interest rate the FRA would expire worthless.

Deliverable: Word or Excel file showing the calculations, explanations and answers.

Reference no: EM132178330

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