Suppose that KF Exports enters into an FRA with Interfirst Bank with a notional

Question

Suppose that KF Exports enters into an FRA with Interfirst Bank with a notional principal of $40 million and the following terms: In six months, if LIBOR is above 6% then KF will pay Interfirst according to the standard FRA formula; on the other hand, if LIBOR is less than 6% then Interfirst will pay KF. If LIBOR is 5.5% in six months, then who pays who and how much do they pay? Round your answer to the nearest dollar.

KF OR Interfirst will pay KF OR Interfirst  $______________

What if LIBOR is 6.5%? Round your answer to the nearest dollar.

KF OR Interfirst will pay KF OR Interfirst  $______________

Suppose that KF Exports enters into an FRA with Interfirst Bank with a notional principal of $40 million and the following terms: In six months, if LIBOR is above 6% then KF will pay Interfirst according to the standard FRA formula; on the other hand, if LIBOR is less than 6% then Interfirst will pay KF. If LIBOR is 5.5% in six months, then who pays who and how much do they pay? Round your answer to the nearest dollar.

KF OR Interfirst will pay KF OR Interfirst  $______________

What if LIBOR is 6.5%? Round your answer to the nearest dollar.

KF OR Interfirst will pay KF OR Interfirst  $______________

Explanation / Answer

CFFRA

=[np ×(rs rf )× (D/360)]/{1+ [rs ×(D/360)] }
In this equation, np stands for the contract’s notional principal, rs is the reference rate on the contract settlement date ,rf is the forward rate established at the beginning of the contract, and D is the number
of days in the contract period.

1. If LIBOR is 5.5% in six month, then interfirst will pay Kfs$ 97324

CFFRA

=[40000000 ×(.055 .06 )× (180/360)]/{1+ [.055 ×(180/360)] }

=$ 97324

2.

If LIBOR is 6.5% in six month, then kfs will pay interfirst $ 96852

CFFRA

=[40000000 ×(.065 .06 )× (180/360)]/{1+ [.065 ×(180/360)] }

=$ 96852

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