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CA Final · Advanced Financial Management · Interest Rate Risk Management

Kaveri Ltd buys a 3x9 FRA on Rs 20 crore at an agreed rate of 8% p.a. At settlement (3 months from now), the reference rate is 9% p.a. Use a 6-month contract period, a 360-day year, 180 days in the period, and settlement at the start of the period by discounting at the reference rate. What is the settlement amount received by Kaveri?

Kaveri receives about Rs 9,56,938. The undiscounted interest difference is Rs 10,00,000 (1% on Rs 20 crore for half a year). Since settlement occurs at the start of the period, it is discounted by 1.045 at the 9% reference rate.

  1. ARs 9,56,938 approxCorrect
  2. BRs 10,00,000
  3. CRs 8,26,446 approx
  4. DRs 9,09,091 approx

Explanation

Interest differential = 20,00,00,000 x (9%-8%) x 180/360 = Rs 10,00,000. Discounting at the reference rate: 1 + 0.09 x 180/360 = 1.045. 10,00,000/1.045 = Rs 9,56,938. Rs 10,00,000 ignores discounting because payment is made at the start of the period.

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