FRM Part I · FRM Exam Part I · Interest Rates
A company will receive a FRA payoff on a USD 20 million notional. It bought a FRA at a fixed rate of 4.00% for a three-month period (0.25 year) starting in six months. At settlement, the three-month reference rate is 5.00%. Settlement occurs at the start of the period, and payment is discounted using the reference rate. What is the approximate payoff, rounded to the nearest dollar?
The payoff is about USD 49,383. The interest difference is 1% on 20 million for a quarter, which is 50,000, and because it is paid at the start of the period it is discounted at 1.0125, giving 49,383.
- AUSD 49,383Correct
- BUSD 50,000
- CUSD 50,617
- DUSD 200,000
Explanation
Undiscounted payoff = 20,000,000 × (5% − 4%) × 0.25 = 50,000. Settlement at the start of the period discounts by 1 + 0.05 × 0.25 = 1.0125, giving 50,000 / 1.0125 = 49,383. The 50,000 option ignores discounting, and the 200,000 option ignores the accrual fraction.
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