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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Meridian Traders expects to borrow Rs 10 crore for 6 months starting 3 months from now. It buys a 3x9 FRA at a fixed rate of 8.00% p.a. On the settlement date, the 6-month reference rate is 9.00% p.a. Ignoring discounting, what is the gross settlement amount (undiscounted) and who receives it?

The settlement is Rs 5,00,000 received by Meridian. The FRA buyer gains when the reference rate (9%) exceeds the contract rate (8%). The 1% difference applied for half a year on Rs 10 crore gives 0.5%, which is Rs 5,00,000.

  1. ARs 5,00,000 received by Meridian TradersCorrect
  2. BRs 5,00,000 paid by Meridian Traders
  3. CRs 10,00,000 received by Meridian Traders
  4. DRs 2,50,000 received by Meridian Traders

Explanation

The buyer of an FRA gains when the reference rate exceeds the contract rate. Difference = 1% p.a. for 6 months = 0.5%. 10 crore x 0.5% = Rs 5,00,000, received by the buyer. Rs 10,00,000 ignores the 6-month fraction (full year). The option showing payment has the direction wrong.

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