Matthew enters into an FRA with the local bank.The current one year forward rate is 4%.If the yield on a one year T-Bill in one year is 3.5%,what payment will be made to settle the agreement?
A) Matthew would pay the bank 0.5%.
B) Matthew will use the market rate rather than the FRA rate.
C) The bank would pay Matthew 0.5%.
D) Matthew would not exercise his option.

Question

Quizplus · Accepted Answer

As the actual T-bill rate in one year is less than the 4% of Matthew's contract,He pays the bank the difference (0.5%).

Matthew Enters into an FRA with the Local Bank