Forward Rate Agreement

Consider the following 6-9 FRA. Assume the buyer of the FRA agrees to a contract rate of 6.35% on a notional amount of $10 million USD. Calculate the settlement amount of the seller if the settlement rate is 6.85%. Assume a 30/360 day count basis ?

a) -12500, b) -12290, C) 12500 & d) 12250

What does 6-9 FRA maans ?

6-9 FRA means that your Agreement will start after 6 months and it will go till 9 months. So, the total duration of your FRA is 3 months and in your case 90 days

As per correctly explained by exotichedge agreemnet will go till 9 months, strart after 6 months and 6-9 means FRA for 3 months.

The correct answer, by the way, is b). The difference in the interest rates is 0.5% for one year, or 0.125% for 3 months; 0.125% of $10 million is $12,500. However, FRAs are settled at inception, not at maturity, so that $12,500 has to be discounted for three months at 6.85% (the market rate), to get a present value (at inception of the loans, 6 months after the initiation of the FRA) of $12,290.

Thanks Magician

My pleasure.