Settlement FRA when

CFA Level II Derivatives
#1

Hello,

Something not clear to me but when does a FRA 2x5 settle?

Expiry date in 60 days
End of the notional borrowing period in 150 days

I thought settlement at end of the notional borrowing period in 150 days but apparently settlement at expiry date? Is this correct ?
I know we have to take the PV of profit/loss to have the Value at expiry date but didn’t expect settlement to take place at expiry date.

Thanks!

#2

It settles two months from inception.

#3

Thanks, so it settles at expiry date.

#4

Yup.

You compute the settlement value as of the end of the loan period, then discount it back to the beginning of the loan period (expiry of the FRA) using the market spot rate.

1 Like
#5

The idea as that is it is a forward there is credit risk on each side.
On expiry we know what the payment will be so why wait?
So settle at expiry but discount back.
You could then invest the settlement amount at market rates and have the theoretical amount you need to cover what you may have been hedging.

#6

thanks Mikey!