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CA Final · Advanced Financial Management · Interest Rate Risk Management

A treasurer at Himalaya Foods Ltd is quoted a '4x10' FRA by its bank. Which statement correctly describes this contract?

A 4x10 FRA fixes the interest rate for a six-month period that starts four months from today and ends ten months from today. The first number is the start month and the second is the end month, so the period length is the difference.

  1. AThe FRA fixes the rate for a 6-month period that begins 4 months from now and ends 10 months from nowCorrect
  2. BThe FRA fixes the rate for a 10-month period that begins 4 months from now
  3. CThe FRA fixes the rate for a 4-month period that begins 10 months from now
  4. DThe FRA fixes the rate for a 6-month period that begins now and ends after 10 months

Explanation

In FRA notation, the first number is the months until the contract period starts (and normally until settlement), and the second is the months until it ends. So 4x10 covers a 10 − 4 = 6 month period starting after 4 months. The 10-month option wrongly uses the end date as the length of the period.

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