interest rate fra

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February 20, 2022 at 12:00 pm #648968
Frooti
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Question: current spot is 3.5% , basis is 0.6% . If curent spot falls by 0.5% what will be it’s impact on FRA?

The FRA fixed rate is 3.45%. Actual SONIA is 3.5%. The company will therefore have
to make a payment to the bank.
This will be: £7.1m (3.50% – 3.45%) ×(4/12)x (1/(1+(3.5%x4/12))

or £1,169.65
This will be deducted from the actual receipts of £97,033 (estimated above) to give a
net £95,863.

I have not understood the calculation above in fra pls tell
February 20, 2022 at 7:12 pm #648992
John Moffat
Keymaster
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You have not typed out the whole question because I have no idea where the 7.1M or the 4/12 (and SONIA is not a standard term so I do not know what it refers to).

Assuming that it is a past exam question please tell me the name and date of the question, because I have all past questions.
February 21, 2022 at 2:57 am #649014
Frooti
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Question is interest rate hedges june 5
February 21, 2022 at 4:11 am #649020
Frooti
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Assume that it is now 1 June. Your company expects to receive £7.1 million from a large
order in five months’ time. This will then be invested in high?quality commercial paper for a
period of four months, after that it will be used to pay part of the company’s dividend. The
company’s treasurer wishes to protect the short?term investment from adverse movements
in interest rates, by using futures or forward rate agreements (FRAs).
The current yield on high?quality commercial paper is SONIA + 0.60%.
LIFFE £500,000 three month sterling futures. £12.50 tick size.
September 96.25
December 96.60
Futures contracts mature at the month end. SONIA is currently 4%.
FRA prices (%)
4 v 5 3.85 – 3.80
4 v 9 3.58 – 3.53
5 v 9 3.50 – 3.45
Required:

(c) If SONIA fell by 0.5% during the next five months, show the expected outcomes of
each hedge in the cash market, futures market and FRA market as appropriate.
(6 marks)
February 21, 2022 at 9:50 am #649053
John Moffat
Keymaster
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By June 5 do you mean the June 2015 exam or the June 2005 exam or what?
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