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Class-09. Note On FRA

excel workings to understand FRA

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archajhalani2001
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19 views

Class-09. Note On FRA

excel workings to understand FRA

Uploaded by

archajhalani2001
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Investment of 10 crores after 3 months for 3 months

Rk 7%
Principle 100000000
RM 1 9%
d 90
Cash Fl 500000
PV at t= 488997.555
ths for 3 months
Bank Long
Pro investment Short
Q2. Assume that a 3 x 9 FRA has a contract rate of 6%
Let the notional principal be $5 million
and assume that the day-count convention is 30/36
If, after three months, the LIBOR were to be 7.50%
How much the short party in the FRA contract will

Explanation
The short would need to make a payment of
5,000,000 x (0.075-0.06) x (180/360) = $37,500 to
This payment would need to be made nine months
the present value of this amount would be comput
That is, the amount of $37,500 would be discounte
after three months, which we have assumed is 7.5
Since the reference rate (LIBOR) is greater than th
the short will pay $36,145 to the long
ract rate of 6% per annum,

vention is 30/360.
re to be 7.50%,
A contract will have to pay or receive at the end of the contra

yment of
0) = $37,500 to the long.
de nine months from now. In practice,
uld be computed and paid three months from now
d be discounted using simple interest based on the prevailing
assumed is 7.50%.
greater than the contract rate,
f the contract?

he prevailing LIBOR
A bank sells a “three against nine” $3,000,000 FRA (forward rate agre
six-month period beginning three months from today and ending nine
purpose of the FRA is to cover the interest rate risk caused by the ma
having made a three-month Eurodollar loan and having accepted a ni
deposit. The agreement rate (per annum) with the buyer is 5.5 percen
183 days in the six-month period. Assume that three months from tod
(per annum) is 4 7/8 percent. Determine how much the FRA is worth
the buyer pays the seller or the seller pays the buyer

Solution
Bank
Rk
d (days)
Rm
Amount

Cash Flow
PV of cash flow
s from today. The
smatch from
h Eurodollar
are actually
ettlement rate
pays whom --

short
5.50%
183
4.875%
3000000

-9400.68493150685
-9176.39743662603
SIMPLE FORWARD RATE AGREEMENT SETTLEMENT PROBLEM
FRA
Transaction date
Settlement date
Notional
K Rate
Position
L Underlying
Sd

If the 91day MIBOR on the settlement day is 6.2% p.a.,


compute the net settlement amount as on the s

0.0248877317157
ENT SETTLEMENT PROBLEM

3/15/2019
4/1/2019
100cr
6.10%
Long
91day MIBOR
91 days

ment day is 6.2% p.a.,


et settlement amount as on the settlement date

Notional * (6.2% - 6.1%) * 91/360


divided by
(1 + 6.2%*91/360)

Notional is 100 cr
NOTE THE FORMULA FOR FRA SETTLEMENT

=(LIB-K)*d/365 /(1+LIB * d/360)


FRA BUYER IS ALWAYS IS THE BORROWER
FRA SELLER IS ALWAYS IS THE INVESTOR OR THE LENDER
IF FRA SETTLEMENT AS PER ABOVE FORMULA IS POSITIVE , THE FRA
IN OTHER TERMS , FRA BUYER WILL RECEIVE THE SETTLEMENT AS PE
E LENDER
S POSITIVE , THE FRA SELLER WILL SETTLE TO THE FRA BUYER
E SETTLEMENT AS PER FORMULA CALCULATION

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