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CA Final · Advanced Financial Management · Interest Rate Risk Management

Meridian Textiles Ltd expects to borrow for six months starting three months from today and wants to lock in the interest rate. Its bank quotes a '3 x 9' FRA. What does '3 x 9' mean?

A 3 x 9 FRA begins in three months and ends in nine months from today, so the protected interest period is six months. The first number is the deferment period and the second is the end point, so the contract length is their difference.

  1. AThe FRA starts in 3 months and ends in 9 months, covering a 6-month interest periodCorrect
  2. BThe FRA starts in 3 months and runs for 9 months
  3. CThe FRA covers 3 months of interest starting 9 months from today
  4. DThe FRA settles after 3 months on a notional principal of Rs 9 crore

Explanation

In FRA quotation 'A x B', A is the months until the contract period begins and B the months until it ends. The interest period is therefore B minus A, which is 9 minus 3 = 6 months. Reading 9 as the duration, or as the notional, confuses the convention.

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