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Hello sir,
This is a question from PRE-JUNE 2023
A company that has a $10m loan with a variable rate of interest, has acquired a forward rate agreement (FRA) with a financial institution that offered a 3-6, 3.2% – 2.7% spread.
What would be the payment made to the financial institution under the terms of the FRA if the actual rate of interest was 3% (to the nearest $)?
The answer is to compute the difference of interest of the actual rate -FRA(3.20) for three month
3.2-3 =.2%
.002 x 10M x 3/12 = $5000is this always which we have to do for the FRA question .because from the question it was not specified that the difference of the rates of interest was required.
I thought it was the total of the loan payment was required using the FRA
10m*1.032*3/12=$2.58mCan you clarify a bit.
Thanks,
The payment to or from the institution is always the difference in the interest rates.
I explain this in my free lectures on interest rate risk management! (The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.)
Hi Sir,
Now is it correct that the the loan from one bank and the the FRA from another bank.Could it be like that.
Is that the loan from one institution and getting the FRA could be from another institution,
Thanks,
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