1.Consider the following 6x9 FRA,Assume the buyer of the FRA agrees to a contract rate of 6.35%on a notional amount of 1 0 million USD,Calculate the settlement amount of the seller if the settlement rate is 6.85%.Assume a 30/360 day count basis.

 

　　A.-12,500

 

　　B.-12,290

 

　　C.+12,500

 

　　D.+12,290

 

　　Answer:B

 

　　The seller of an FRA agrees to receive fixed.Since rates are now higher than the contract rate,this contract must show a loss for the seller.The loss is$10,000,000 X(6.85%-6.35%)x(90860)=$12,500 when paid in arrears(i.e.,in 9 months).On the settlement date(i.e.,brought forward by 3 months),the loss is$12,500/(1+6.85%x 0.25)=$12,290.

 

　　2.A long position in a FRA 2x5 is equivalent to the following positions in the spot market

 

　　A.Borrowing in 2 months to finance a 5-month investment.

 

　　B.Borrowing in 5 months to finance a 2-month investment..

 

　　C.Borrowing half a loan amount at 2 months and the remainder at 5 months.

 

　　D.Borrowing in 2 months to finance a 3-month investment.

 

　　Answer:D

 

　　A 2x 5 FRA is equivalent to a commitment to borrow in 2 months(60 days)to finance a 3-month(90-day)investment.Note:According to GARP's answer key,the correct answer is"b",but we believe that's a mistake.

 

　　3.Corporates normally use FRAs to:

 

　　A.Lock-in the cost of borrowing in the future

 

　　B.Lock-in the cost of lending in the future

 

　　C.Hedge future currency exposures

 

　　D.Create future currency exposures

 

　　Answer:A

 

　　Usually,corporates use FRAs to lock-in the cost of borrowing in the future

 

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