Skip to content

CA Final · Advanced Financial Management · Interest Rate Risk Management

Meridian Textiles Ltd expects to borrow Rs 10 crore for 6 months starting 3 months from today. To fix its borrowing cost it enters into a '3 x 9' FRA with a bank. Which description of this FRA is correct?

A 3 x 9 FRA begins three months from today and ends nine months from today, so it fixes the interest rate for a six-month period. The first number is the start month and the second is the end month, hence the covered period is the difference.

  1. AThe FRA starts in 3 months and ends in 9 months, so the covered interest period is 6 monthsCorrect
  2. BThe FRA starts in 9 months and ends in 3 months, so the covered period is 6 months
  3. CThe FRA starts today and ends in 9 months, so the covered period is 9 months
  4. DThe FRA starts in 3 months and ends in 12 months, so the covered period is 9 months

Explanation

In FRA notation 'A x B', A is months until the settlement or start date and B is months until the end of the loan period. For 3 x 9, the period starts after 3 months and ends at 9 months, giving a 6-month period. The option reversing start and end is wrong because the start date must precede the end date.

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