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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Kaveri Ltd buys a 3x9 FRA (a six-month rate starting three months from now) on ₹20 crore at an agreed FRA rate of 6% p.a. At settlement, the six-month reference rate is 7% p.a. The FRA is settled at the start of the contract period, with the payment discounted at the reference rate. What is the settlement amount received by Kaveri Ltd (nearest rupee)?

Kaveri Ltd receives about ₹9,66,184. The FRA buyer gains because the rate rose by 1%. The interest difference for six months is ₹10,00,000, and since settlement happens at the start of the period it is discounted at 7% for six months, which gives ₹9,66,184.

  1. A₹9,66,184Correct
  2. B₹10,00,000
  3. C₹9,70,874
  4. D₹20,00,000

Explanation

Undiscounted settlement = 20,00,00,000 × (7% − 6%) × 6/12 = ₹10,00,000. Because it is paid at the start of the period, it is discounted at the reference rate: 10,00,000 / (1 + 0.07 × 0.5) = 10,00,000 / 1.035 = ₹9,66,184. ₹10,00,000 omits discounting. ₹9,70,874 wrongly discounts at the FRA rate (1.03). ₹20,00,000 ignores the six-month fraction.

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