a bank sells a three against nine $3000000 FRA (forward Rate agreement) for a si

Question

a bank sells a three against nine $3000000 FRA (forward Rate agreement) for a six month period beggining three months from today and ending nine months from today. the purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three months eurodollar loan and having accepted a nine month eurodollar deposit. the agreement rate (per annum) with the buyer is 5.5 percent. there are actually 183 days in six month period. assume that three month from today the settlement Rate (per annum) is 4.9 percent. determine how much the FRA is worth and pays whom the buyer pays the seller or seller pays the buyer

Explanation / Answer

Because the settlement rate is less than the agreement rate, thus buyer will pay the absolute value of the FRA to the seller.

Computation of the absolute value of FRA:

= 3,000,000 * [(0.04875*0.55) * 92/360] / [1 + (0.04875 * 92/360) ]

= 3,000,000 * [-0.001597 / 1.012458)

= 4,732.05

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