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In 90 days, a company will have to borrow $5 million for 180 days and they are concerned that interest rates may rise leading to increased interest expense. They decide to hedge with a 3 x 9 FRA. Current 90-day LIBOR is 3% and 270 day LIBOR is 4%.
-Does the company take a long or short position in the FRA?
-Calculate the price of this FRA.
-Suppose that 60 days into the 90-day term of the FRA, 30-day LIBOR is 2% and 210-day LIBOR is 2.75%.
-Calculate the value of this FRA to the company.
-Determine whether this represents a gain or a loss to the company.
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