- This topic has 3 replies, 2 voices, and was last updated 5 years ago by
.
- Posts
Hi Dear Tutor, I have a question.
(AIR) Actual interest rate 3.5%-4.5% Forward rate agreement(FRA)-if AIR to be lower than FRA then the difference will be paid to the bank
12000*(4.5%-3.5%)*0.5/100=60-pays to the bank
AIR 5.5%-3.5%FRA-if AIR to be higher than FRA then the difference will be paid to the company
12000*(5.5%-3.5%)*0.5/100%=120 the bank pays to the bank
Overall (120-60)=the company is still receiving 60
I solved the question in this way and if the company want to take advantage of interest receipt then AIR should be higher than FRA.
In the answer, the calculation has showed separately and is ti also acceptable?
Thanks in advance
It is not the companies choice as to whether the actual interest rate is higher or lower than the FRA.
The whole point of an FRA is to fix the interest they end up paying whatever actually happens to the actual rate.
Your calculations are fine as far as they go but you need to make it clear that whatever happens they will end up paying a net 270,000.
- The topic ‘September/december 2015 question 2’ is closed to new replies.