CA Final · Advanced Financial Management · Interest Rate Risk Management
Market spot rates are 6-month 8% p.a. and 9-month 8.5% p.a. (simple interest, annualised). What is the implied 6 x 9 FRA rate, to the nearest 0.01% p.a.?
The implied rate is about 9.13% p.a. Divide the 9-month factor 1.06375 by the 6-month factor 1.04 to get 1.022837, take the 2.2837% three-month return and multiply by four.
- A9.00%
- B9.13%Correct
- C8.50%
- D9.50%
Explanation
Growth to 9 months = 1 + 0.085 x 0.75 = 1.06375. Growth to 6 months = 1 + 0.08 x 0.5 = 1.04. Ratio = 1.022837, so 3-month return = 2.2837%; annualised x4 = 9.13%. The 9.00% option wrongly uses 9x0.085-6x0.08 over 3 months without compounding the base: (0.6375-0.4)... which ignores dividing by 1.04.
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