Which of the following statements is false:

Which of the following statements is false:

A. The value of an FRA at expiration is determined by the spot interest rate prevailing at expiration

B. The value of an FRA (forward rate agreement) at inception is zero.

C. An FRA can be valued at anytime in its lifetime using the spot interest rate for the period to which the FRA relates

D. Notional principals are exchanged at the start and the end of an FRA to eliminate credit risk

View Answer

Answer: D

Explanation:

Notional principals are not exchanged at the start and the end of an FRA. In fact, if the notional principals were to be exchanged, it would increase credit risk and not decrease it by introducing settlement risk. Therefore Choice ‘d’ is incorrect.

All other choices correctly describe various aspects of an FRA.