Explanation

A Forward Rate Agreement (FRA) 2 × 5 represents:

• 2 = time to contract expiration (2 months)
• 5 = time to loan maturity (5 months)
• The loan period is therefore 5 - 2 = 3 months

A long position in an FRA means the party will receive the floating rate and pay the fixed rate. This is equivalent to:

Borrowing at a fixed rate starting in the future

For FRA 2 × 5:

• The contract settles in 2 months
• The underlying loan starts in 2 months and lasts for 3 months (until month 5)
• A long position benefits if rates rise above the fixed rate

This is equivalent to borrowing in two months to finance a three-month investment (Option D). The long FRA position effectively locks in a borrowing rate for a future period.

Why other options are incorrect:

• A: This describes borrowing for 5 months, not 3 months
• B: This has the timing reversed
• C: This describes splitting borrowing across two periods, not a single forward borrowing