Reading 71: Forward Markets and Contracts - LOS f ～ Q1-4

答案和详解如下：

1.An FRA is:

A)   a Forward Rate Agreement.

B)   the Futures Regulatory Administration.

C)   the Forwards Regulatory Agency.

D)   a Forward Riskfree Asset.

The correct answer was A)

An FRA is a forward rate agreement.

2.A forward rate agreement (FRA):

A)   is risk-free when based on the Treasury bill rate.

B)   is priced in dollars.

C)   can be used to hedge the interest rate exposure of a floating-rate loan.

D)   is settled by making a loan at the contract rate.

The correct answer was C)

An FRA settles in cash and carries both default risk and interest rate risk, even when based on an essentially risk-free rate. It can be used to hedge the risk/uncertainty about a future payment on a floating rate loan.

3.The short in a forward rate agreement:

A)   profits if London Interbank Offered Rate (LIBOR) increases.

B)   profits if LIBOR decreases.

C)   must borrow money at the contract rate at settlement.

D)   faces default risk.

The correct answer was D)

Each party to a forward contract faces default risk to some extent. If the floating rate at contract expiration (LIBOR or Euribor) is above the rate specified in the forward rate agreement (FRA), the long position in the contract can be viewed as the right to borrow at below market rates and the long will receive a payment from the short. If floating rates (LIBOR or Euribor) at the expiration date are below the rate specified in the FRA the short will receive a cash payment from the long. However, "the short profits if LIBOR decreases" is not necessarily true because LIBOR can decrease but remain above the rate specified in the FRA.

4.A forward rate agreement (FRA):

A)   generally uses a fixed reference interest rate.

B)   requires the long to pay cash to the short if the rate specified in the contract at expiration is below the current floating rate.

C)   can sometimes be viewed as the right to borrow money at below-market rates.

D)   must consider the creditworthiness of the parties making the deal when determining the rate.

The correct answer was C)

If the floating rate is above the rate specified in the agreement, the long position can be viewed as the right to borrow at below-market rates. Floating rates like LIBOR are used in FRAs. The long must pay the short only if the contracted rate at the expiration date is above the floating rate. Since the contracts are settled in cash and no loan is made, the creditworthiness of the parties is irrelevant to the forward interest rate, so a riskless rate (or close proxy, such as LIBOR) can be specified in the contract.