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Determine the cash flow on the FRA

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Question - Alphabet can borrow $10 million for a 3-month period in 3 months' time. In order to hedge the exposure to interest rates rising Alpha bet buys a 3X6 FRA based on LIBOR with a 90/360 day-count convention. All the interest rates are compounded quarterly. It enters FRA rate of 4% per annum. Alpha bet can borrow at LIBOR + 0.2%.

In three months-time at settlement of the FRA LIBOR is 4.5%.

A. Determine the cash flow on the FRA?

B. When Alphabet borrows for three-month period the effective cost of borrowing is?

Reference no: EM132998628

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