A company will need to ‘roll over' its existing $390561 funding arrangement in two months' time for a further 180 days. It is concerned that interest rates in the short-term debt market may rise in the mean time, and decides to manage the risk exposure by entering into a forward rate agreement with its bank. The bank quotes a price (2Mv8M) of 8.38 to 10. In two months' time the reference rate (BBSW) is 8.8% per annum. Calculate the settlement amount. Question 10Answera.$-744.53b.$-754.02c.$-1242.53d.$374100.57e.$-1258.39f.$374854.59
Question
A company will need to ‘roll over' its existing -744.53b.-1242.53d.-1258.39f.$374854.59
Solution
To calculate the settlement amount, we need to use the formula for the Forward Rate Agreement (FRA) payoff:
FRA Payoff = Principal * (FRA Rate - Reference Rate) * (Days/360) / (1 + Reference Rate * (Days/360))
The principal is the amount of the funding arrangement, which is $390,561. The FRA rate is the rate agreed upon in the FRA, which is 8.38%. The reference rate is the actual rate at the time of the rollover, which is 8.8%. The number of days is 180.
Substituting these values into the formula, we get:
FRA Payoff = $390,561 * (8.38% - 8.8%) * (180/360) / (1 + 8.8% * (180/360))
Solving this equation will give us the settlement amount.
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