Question

6. An investor goes short a 6X9 FRA for which the underlying is LIBOR for a notional of $1O million. A dealer quotes this instrument at 3.75%. At expiration, 30-day LIBOR is 3.50%, 60-day LIBOR is 3.75%, 90. day LIBOR is 4.10% and 120-day LIBOR is 4.25%. The payment made at expiration is closest to: C 58.661.22 from the investor to the dealer Peuse edan

Answer 1

6X9 FRA means a forward rate agreement starting 6 months later for next three months and thus maturing (ending) in 6 + 3 = 9 months from now.

In effect it's a 3 months or 90 days forward rate agreement.

FRA Rate = 3.75%

Underlying rate = Spot rate = 90 days LIBOR = 4.10% is the relevant LIBOR for this uqestion.

Since underlying rate > FRA rate, the investor will pay the differential to the dealer.

And the amount to be paid

= [(LIBOR - FRA Rate) x FRA Period x Notional] / [360 + LIBOR x FRA Period]

= (4.10% - 3.75%) x 90 x 10 mn / (360 + 4.10% x 90)

= $ 0.35% x 90 x 10,000,000 / 363.69

= $ 8,661.22