Skip to content

CA Final · Advanced Financial Management · Interest Rate Risk Management

Current market rates: 6-month rate is 6% p.a. and 9-month rate is 6.8% p.a. (simple interest, annualised). A bank quotes a 6x9 FRA at the implied forward rate. Which rate is closest to the implied forward rate for the 3-month period starting after 6 months (annualised, simple interest)?

The implied forward rate is about 8.2%. Dividing the 9-month growth factor 1.051 by the 6-month growth factor 1.03 gives 1.0204, a 2.04% return for three months, which annualises to roughly 8.16%.

  1. A7.6%Correct
  2. B6.8%
  3. C8.2%
  4. D7.8%

Explanation

Growth to 9 months = 1 + 0.068 x 0.75 = 1.051. Growth to 6 months = 1 + 0.06 x 0.5 = 1.03. Ratio = 1.051/1.03 = 1.020388, so 3-month rate = 2.0388%, annualised = 8.155%. This is closest to 8.2%, so the keyed answer must be 8.2%.

Did you get it right without looking?

One question tells you little. A timed set on Interest Rate Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Interest Rate Risk ManagementFree diagnostic mock

More Interest Rate Risk Management questions