Which of the following is a common use of FRAs?
A)To lock in an interest rate on relatively shorter term borrowings.
B)To lock in an interest rate on medium-term borrowings.
C)To lock in an interest rate on relatively longer term borrowings.
D)To lock in an interest rate on any term of borrowings.

Question

Quizplus · Accepted Answer

FRAs are commonly used to lock in an interest rate on relatively shorter term borrowings, typically up to 6 months. The buyer of the FRA agrees to pay the seller a fixed rate of interest on a notional amount of money for a set period starting at a future date. If interest rates increase during that period, the buyer receives a payment from the seller equal to the difference between the fixed rate and the actual rate at the time of settlement. If interest rates decrease, the buyer must pay the seller the difference. Therefore, FRAs are commonly used by corporations and financial institutions to manage interest rate risk on short-term borrowings.

Which of the Following Is a Common Use of FRAs