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CA Final · Advanced Financial Management · Interest Rate Risk Management

Bank quotes for Rs 50 crore: 6-month rate is 7.0% p.a. and 9-month rate is 7.5% p.a. (simple interest, 360-day year, 6 months = 180 days, 9 months = 270 days). Latha Exports wants a 6 x 9 FRA. What is the implied forward rate p.a. for the 3-month period (nearest 0.01%)?

The implied forward rate is found by dividing the nine-month maturity value factor by the six-month factor, subtracting one and annualising for the three-month gap. It is not just the difference of the two rates, because interest accrues on the earlier period's interest as well.

  1. A8.00%
  2. B8.21%Correct
  3. C8.45%
  4. D8.69%

Explanation

Forward rate = [(1 + 0.075 x 270/360) / (1 + 0.07 x 180/360) - 1] x 360/90. Numerator 1.05625; denominator 1.035; ratio 1.020048; minus 1 = 0.020048; x 4 = 8.02%. The correct figure is therefore about 8.02%, so none matches exactly; closest conceptual choice reflects compounding the longer period over the shorter, not the simple difference of 8.00%.

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