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Answer: A bank that intends to lend cash at LIBOR in the future will hedge by receiving the fixed interest rate, R(k), in an FRA
**Correct answer: D** A bank that plans to lend at LIBOR in the future is exposed to falling rates on the lending side, so it hedges by **receiving the fixed rate** in an FRA. - **A is false**: FRAs are **OTC**, not exchange-traded. - **B is false**: FRAs are **cash settled**. - **C is false**: A future borrower hedges by **paying fixed and receiving floating** in the FRA, not receiving fixed. - **D is true**: The lender hedges by **receiving fixed** in the FRA.
Author: Manit Arora
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A
It is an exchange-traded instrument
B
It can be cash or physically settled
C
A borrower who intends to borrow cash at LIBOR in the future will hedge by receiving the fixed interest rate, R(k), in an FRA
D
A bank that intends to lend cash at LIBOR in the future will hedge by receiving the fixed interest rate, R(k), in an FRA
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