Question

took a short position in a FRA with a notional principal of $10,000,000. The agreement expires in 30 days and is based on a 90-day LIBOR. The FRA is based on a fixed rate of 6%. Assume that at expiration, the 60-day LIBOR is 5.25%, and the 90-day LIBOR is 5.5%. • Calculate the value of the FRA at expiration. Is Mary Hames to receive or to pay money? • What may have motivated Mary Hames to enter into the FRA? Be as specific as you can.

Answer 1

Value of the FRA is=(((R-FRA)*NP*P)/Y)*(1/(1+R*(P/Y)))

R=reference rate, FRA=FRA rate NP= Notional amount,P= period number of days in the contract, Y=number of days in the year for the convention used.

FRA-.065

R-0.055

P=90 days

Y-360days

Value=-12330.46

If FRA value is positive according to the formula then FRA seller pays to buyer and vice versa. Here FRA Value is negative so Mary holmes will receive the amount . The main motivation is reference rate in this case LIBOR is less than the FRA rate.