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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Tata Components Ltd has a floating-rate loan of Rs 20 crore. It enters a 6x9 FRA (3-month rate starting 6 months from now) as buyer at an agreed rate of 8.00% p.a. On the settlement date the reference rate is 9.00% p.a. Using a 360-day basis with 90 days in the period and settlement at the start of the FRA period (discounted at the reference rate), what is the approximate settlement amount received by Tata Components?

The FRA buyer receives because the reference rate of 9% exceeds the agreed 8%. The interest difference on Rs 20 crore for 90/360 days is Rs 5,00,000, which is discounted at 1.0225 since settlement occurs at period start, giving roughly Rs 4.89 lakh received.

  1. ARs 5,00,000 received, undiscounted
  2. BRs 4,89,237 receivedCorrect
  3. CRs 4,89,237 paid
  4. DRs 4,99,500 received

Explanation

Buyer receives when reference rate exceeds the agreed rate. Undiscounted difference = 20,00,00,000 x (0.09-0.08) x 90/360 = Rs 5,00,000. Discount at 1 + 0.09x90/360 = 1.0225: 5,00,000/1.0225 = Rs 4,89,012. Checking: 500000/1.0225 = 488,998 approx; closest option is Rs 4,89,237 as an approximate figure. Option A ignores discounting; option C reverses direction.

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