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CA Final · Advanced Financial Management · Interest Rate Risk Management

A treasurer at an Indian manufacturing firm buys a '6x9' Forward Rate Agreement on a notional amount of ₹5 crore. Which description of this contract is correct?

A 6x9 FRA begins after 6 months and ends at 9 months from today, so the covered interest period is 3 months. The first number is the start month and the second is the end month; the difference gives the length of the period.

  1. AThe contract starts in 6 months and covers a 3-month interest period, ending 9 months from todayCorrect
  2. BThe contract starts in 6 months and covers a 9-month interest period
  3. CThe contract starts in 9 months and covers a 6-month interest period
  4. DThe contract starts today and covers a 6-month period, with settlement after 9 months

Explanation

In FRA notation 'AxB', A is the months until the interest period begins and B is the months until it ends. A 6x9 FRA therefore begins in 6 months and runs for 9 minus 6, which is 3 months. The option showing a 9-month period confuses the end month with the length of the period.

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