Determine the effective cost of borrowing per annum

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Suppose you have agreed to take a short-term loan amounting of $2,000,000 from your banker. The loan tenure begins on 3 months from today and the financing rate is based on 6-month LIBOR. However, you worried that the recent statements released by the U.S. Federal Funds would significantly affect the global money market and want to hedge against the potential fluctuation in interest rates. You decided to enter a 3 × 9 FRA with a dealer. The dealer agreed to lock in an annual rate of 5.0% for the FRA.

(a) Should you take a long or short position for the FRA? Justify.

(b) Determine the effective cost of borrowing per annum if the 6-month LIBOR at the fixing day is 6.5% with the 30/360 days convention.

Reference no: EM132951923

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