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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Meridian Textiles buys a 3x9 forward rate agreement (FRA) on a notional principal of ₹10 crore at an agreed rate of 8% p.a. At settlement the reference rate for the 6-month period is 10% p.a. Settlement is made at the start of the FRA period, so the payment is discounted at the settlement rate. What is the settlement amount received by Meridian?

The settlement is ₹9,52,381. The 2% rate gap on ₹10 crore for half a year gives ₹10,00,000 of interest difference, which is then discounted by 1.05 because the FRA is settled at the start of the period, not the end.

  1. A₹9,52,381Correct
  2. B₹10,00,000
  3. C₹20,00,000
  4. D₹10,50,000

Explanation

The buyer gains because the reference rate exceeds the agreed rate. Undiscounted interest difference = 10,00,00,000 × (0.10 − 0.08) × 0.5 = ₹10,00,000. Discounting at the settlement rate gives 10,00,000 / (1 + 0.10 × 0.5) = 10,00,000 / 1.05 = ₹9,52,381. ₹10,00,000 is wrong because it skips the discounting, and ₹20,00,000 ignores the half-year period.

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