An investor has bought a financial asset that pays a variable interest rate at the end of a three-year period At the same time, the invest forward rate agreement (FRA) on an agreed forward rate of 3% at the asset’s maturity.
What is the advantage of the FRA?
A . If the market interest rate at the asset’s maturity is lower than 3%. the bank will pay the investor for the difference in rates
B . If the market interest rate at the asset’s maturity is lower than 3%. the asset’s maturity will be extended for another year
C . If the market interest rate at the asset’s maturity is higher than 3%, the investor will have the option to drop the FRA upon payment
D . If the market interest rate at the asset’s maturity is higher than 3%, the investor will be able to receive the higher market rate
Answer: A
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