W
wyatt.krs
Member
For ease of reference, I have included a screenshot of the question below.

In the solution, it states that
caplet = floorlet + (pay fixed & receive floating) (1)
and then it goes on to say that
caplet = floorlet + (FRA borrowing at the fixed rate) (2)
and
floorlet= caplet + (FRA lending at the fixed rate) (3)
I don't understand why FRA is borrowing at the fixed rate in the equation (2) while it says that 'pay fixed and receive floating' in equation (1). From whose point of view are we looking at the cashflow?
Can someone please explain?
Many thanks in advance.

In the solution, it states that
caplet = floorlet + (pay fixed & receive floating) (1)
and then it goes on to say that
caplet = floorlet + (FRA borrowing at the fixed rate) (2)
and
floorlet= caplet + (FRA lending at the fixed rate) (3)
I don't understand why FRA is borrowing at the fixed rate in the equation (2) while it says that 'pay fixed and receive floating' in equation (1). From whose point of view are we looking at the cashflow?
Can someone please explain?
Many thanks in advance.