Solve the questions given below
a. A "three-against-nine" FRA has an agreement rate of 4.75 percent. You believe six-month LIBOR in three months will be 5.125 percent. You decide to take a speculative position in a FRA with a $1,000,000 notional value. There are 183 days in the FRA period.
Determine whether you should buy or sell the FRA and what your expected profit will be if your forecast is correct about the six-month LIBOR rate.
b. A bank sells a "three against six" $4,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having accepted a six-month Eurodollar deposit.
The agreement rate with the buyer is 6.5 percent. There are actually 91 days in the three-month FRA period. Assume that three months from today the settlement rate is 4.875 percent. Determine how much the FRA is worth and who pays who--the buyer pays the seller or the seller pays the buyer.
c. What is a collateralized debt obligation and what effect did they have on the credit crunch?