A company has entered into a forward rate agreement with a corporate borrower. The following terms and conditions apply to the contract: Notional principal: $350 000Contract rate: 12.65% per annumReference rate: 13.10% per annumFRA period: 180 daysWho will be responsible for payment of the settlement amount? Question 10Select one:a.The clearing houseb.The bankc.Neither party—no settlement amount is payabled.The company
Question
A company has entered into a forward rate agreement with a corporate borrower. The following terms and conditions apply to the contract: Notional principal: $350 000Contract rate: 12.65% per annumReference rate: 13.10% per annumFRA period: 180 daysWho will be responsible for payment of the settlement amount? Question 10Select one:a.The clearing houseb.The bankc.Neither party—no settlement amount is payabled.The company
Solution
In a Forward Rate Agreement (FRA), the party that will be responsible for the payment of the settlement amount is the one who is at a disadvantage based on the contract rate and the reference rate. In this case, the contract rate is 12.65% per annum and the reference rate is 13.10% per annum. Since the reference rate is higher than the contract rate, the company who entered into the FRA at the lower rate (12.65%) is at a disadvantage. Therefore, the company will be responsible for the payment of the settlement amount. So, the correct answer is d. The company.
Similar Questions
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