Answer: Borrowing in two months to finance a three-month investment.

## 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

Author: LeetQuiz Editorial Team