Consider a 3 × 9 forward rate agreement. The current annualized 90-day money mar

Question

Consider a 3 × 9 forward rate agreement. The current annualized 90-day money market rate is 2.4% and the 270-day rate is 3.2%. Based on the best available forecast, the 180- day rate at the expiration of the contract is expected to be 3.85%. Assuming a notional principal of $10 million, what value should be placed on the 3 × 9 FRA at time of settlement? (Hint: consider what is the current contract rate (round to 0.001%) in the FRA first and assume that the market rate is realized at the expected rate at its expiration. )

$20,157 paid from long to short.

$13,294 paid from short to long.

$13,490 paid from long to short.

$101,104 paid from long to short.

$20,157 paid from long to short.

$13,294 paid from short to long.

$13,490 paid from long to short.

$101,104 paid from long to short.

Explanation / Answer

ANSWER IS B

WE NEED TO FIND first current contract rate
(1+R270)/(1+R90) - 1

R270 = 0.032*270/360 = 0.024

r90 = 0.024*90/360 = 0.006
current rate = 1.024/1.006) - 1 = 0 .01789 or 0.0179

new increase rate = 0.0385*180/360 = 0.01925
interest saving = (0.01925-0.0179) * 10,000,000
=13500
present value at rate of 3.85
13500/1.01925 = 13245
13294 near this , difference due to decimal approximation

we need to paid from short to long of 13294

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