ACCA FM · Chapter 14 · Question 7 of 10
A company plans to borrow $5m in three months' time for a period of six months. It buys a 3-9 forward rate agreement (FRA) at 4.5%. When the loan is taken out, the reference rate is 5.5%. Ignoring discounting of the settlement, what is the FRA settlement?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) The company receives $25,000
Explanation
The reference rate (5.5%) is above the FRA rate (4.5%), so the bank compensates the company. Settlement = $5,000,000 x (5.5% - 4.5%) x 6/12 = $25,000. This offsets the higher interest on the actual loan, fixing the company's effective rate at the FRA rate plus its lending margin. The loan period is six months, so a full year's difference ($50,000) is wrong.
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