P Ltd. is contemplating to borrow an amount of ₹ 60 crores for a period of 6 months in the coming 3 months' time from now. The current rate of…

CA Final · Advanced Financial Management · MTP · November 2026
P Ltd. is contemplating to borrow an amount of ₹ 60 crores for a period of 6 months in the coming 3 months' time from now. The current rate of interest is 9% p.a., but it may go up in 3 month's time. The company wants to hedge itself against the likely increase in interest rate.The Company's Bankers quoted an FRA (Forward Rate Agreement) at 9.10%-9.20% p.a.What will be the Final settlement amount, if the actual rate of interest after 6 months happens to be (i) 9.50% p.a. and (ii) 8.70% p.a.?Note: Round off all calculations upto whole numbers.

Suggested Answer and Working Notes:

Final settlement amount shall be computed by using formula:(N)(RR - FR)(dtm/DY) / [1+ RR(dtm/DY)]Where,N = the notional principal amount of the agreement;RR = Reference Rate for the maturity specified by the contract prevailing on the contract settlement date;FR = Agreed-upon Forward Rate; anddtm = maturity of the forward rate, specified in days (FRA Days)DY = Day count basis applicable to money market transactions which could be 360 or 365 days.Accordingly,If actual rate of interest after 6 months happens to be 9.50%= (₹60crore)(0.095-0.092)(6/12) / [1 + 0.095(6/12)]= (₹60 crore)(0.0015) / 1.0475 = 8,59,189/-Thus, banker will pay P Ltd. a sum of ₹ 8,59,189/-.If actual rate of interest after 6 months happens to be 8.70%= (₹60crore)(0.087-0.092)(6/12) / [1 + 0.087(6/12)]= (₹60 crore)(-0.00250) / 1.0435 = - ₹ 14,37,470Thus P Ltd. will pay banker a sum of 14,37,470

Topics: Interest Rate Risk Management

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