Skip to content

CA Final · Advanced Financial Management · Interest Rate Risk Management

Mehta Industries buys a 6x12 FRA on a notional Rs 20 crore at an agreed rate of 8% p.a. At settlement (start of the 6-month period) the reference rate is 9% p.a. Settlement is made at the start of the period by discounting at the reference rate. Assume 6 months = 0.5 year. What amount does Mehta receive (nearest rupee)?

Mehta receives about Rs 9,56,938. The undiscounted difference is Rs 10,00,000 (1% on Rs 20 crore for half a year), and because settlement is paid upfront it is discounted at 1.045, the factor from the 9% reference rate over six months.

  1. ARs 9,56,938Correct
  2. BRs 10,00,000
  3. CRs 9,09,091
  4. DRs 10,45,000

Explanation

Interest difference = 20,00,00,000 x (9%-8%) x 0.5 = Rs 10,00,000. Settlement at the start is discounted at the reference rate: 10,00,000 / (1 + 0.09 x 0.5) = 10,00,000/1.045 = Rs 9,56,938. Rs 10,00,000 ignores discounting. Rs 10,45,000 wrongly compounds the amount upward.

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