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

Sol :

FRA agreement value (FRA) = $5,000,000

Duration (n) = 3 months (91 days)

Rate (r) = 5%

Agreement rate (Ar) = 5.5%

Settlement rate (Sr) = 5%

The buyer pays the seller = (Ar - Sr) x n/360 x FRA/(1+r x n/360)

The buyer pays the seller = (5.5% - 5%) x 91/360 x $5000000/(1+ (5% x 91/360)

The buyer pays the seller = (0.055 - 0.05) x 91/360 x $5000000/(1 + (0.05 x 91/360)

The buyer pays the seller = 6241

Therefore option, the buyer pays the seller $6241 is correct.