TM Fincorp has bought a 6 x 9100 crore Forward Rate Agreement (FRA) at 5.25%. On fixing date reference rate i.e. MIBOR turns out be as follows:…

CA Final · Advanced Financial Management · MTP · May 2025
TM Fincorp has bought a 6 x 9100 crore Forward Rate Agreement (FRA) at 5.25%. On fixing date reference rate i.e. MIBOR turns out be as follows: Period Rate (%) 3 months 5.50 6 months 5.70 9 months 5.85 You are required to determine: (i) Profit/Loss to TM Fincorp. in terms of basis points. (ii) The settlement amount. (Assume 360 days in a year)

Suggested Answer and Working Notes:

(i) TM will make a profit of 25 basis points since a 6X9 FRA is a contract on 3-month interest rate in 6 months, which turns out to be 5.50% (higher than FRA price). (ii) The settlement amount shall be calculated by using the following formula: N(RR - FR)(dtm/360) / (1+ RR(dtm/360)) Where N = Notional Principal Amount RR = Reference Rate FR = Agreed upon Forward Rate Dtm = FRA period specified in days. Accordingly: 100 crore(5.50% - 5.25%)(90/360) / (1+0.055(90 / 360)) = 6,16,523 Hence there is profit of 6,16,523 to TM Fincorp.

Topics: Interest Rate Risk Management

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