A financial manager wants to hedge against interest rate risk and decided to invest in a FRA that expires in 90 days, based on a 90-day LIBOR rate, in order to hedge against an increase in short term interest rates. The current term structure of LIBOR sets the rate on the FRA at 6.20%. Thirty (30) days later the interest rates have shifted and the term structure changed as follows: Term : 60 days Interest rate 4.70% and Term: 150 days interest rate 4.95%
Calculate the market value of the FRA based on a notional amount of R20 million and indicate whether the manager gained or lost from this transaction.
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