Question

Manufacturers Hanover Trust sells a "six against nine" $5,000,000 forward rate agreement (FRA) on a 3-month (91 days), which it funds with a 5 percent Eurodollar CD. If the agreement rate is 5.5 percent and the settlement rate is 5 percent then:

• No payment is made because the settlement rate and the CD rate are the same.

• the seller pays the buyer $6,233.

• the buyer pays the seller $6,241.

• the buyer pays the seller $6,233.

• the seller pays the buyer $6,241.

Answer 1

FRA agreement rate is 5.5%

So buyer of FRA will pay fixed that is 5.5%

Floating rate will be paid by seller of the FRA.

Settlement rate is 5% which will be paid by seller.

Notional amount = 5000000

Days = 91

Settlement amount from seller to buyer = ( Received interest - paid interest rate)*Notional amount * days/365

=(5.5%-5%)*500000*91/365

=6232.876712

Amount is positive for seller. It means seller willl receive and buyer will pay $6233

Answer is C.