Question

Bankers Trust sells a "six against nine" $10,000,000 forward rate agreement (FRA) on a 30month (91 days), 5 percent loan, which it funds with a 4.5 percent Eurodollar CD. If the agreement rate is 5 percent and the settlement rate is 4.5 percent then: Multiple Choice

A.the buyer pays the seller $12,497.

B.the seller pays the buyer $12,639.

C. The seller pays the buyer $12,497.

D. the buyer pays the seller $12,639.

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

Answer 1

Answer:

D. the buyer pays the seller $12,639.

Explanation:

Since the agreement rate is 5 percent and the settlement rate is 4.5 percent:

Buyer pays seller amount =10000000 * (5% - 4.5%) * 91 / 360 = $12,639

Hence:

Option D is correct and other options A, B, C, and E are incorrect.