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CA Final · Advanced Financial Management · Interest Rate Risk Management

Market spot rates are 6-month 7.0% p.a. and 9-month 7.5% p.a. (simple interest, annualised). What is the implied FRA rate for a 6 x 9 FRA, to the nearest 0.01% p.a.?

The implied forward rate is about 8.21% p.a., found by dividing the 9-month growth factor 1.05625 by the 6-month factor 1.035 and annualising the 3-month return.

  1. A8.45%Correct
  2. B8.05%
  3. C7.50%
  4. D8.56%

Explanation

Growth to 9 months = 1 + 0.075 x 9/12 = 1.05625. Growth to 6 months = 1 + 0.07 x 6/12 = 1.035. Ratio = 1.020531; minus 1 = 0.020531 for 3 months; annualised x4 = 8.21%. Recomputing: 1.05625/1.035 = 1.02053, so 2.053% x 4 = 8.21%. So the correct figure is 8.21%, and none of the listed options matches; hence option 0 is not valid.

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