You bought a USD 4,000,000 6x9 FRA at 6.75%. The settlement rate is 3-month (90-day) BBA LIBOR, which is fixed at 5.50%. What is the settlement amount at maturity?
A) You receive USD 12,330.46
B) You pay USD 12,330.46
C) You pay USD 12,163.81
D) You receive USD 12,163.81

Question

Quizplus · Accepted Answer

To calculate the settlement amount, we need to first calculate the settlement rate using the formula:

Settlement rate = Forward rate - Spot rate
Settlement rate = 6.75% - 5.50%
Settlement rate = 1.25%

The settlement amount is then calculated as:

Settlement amount = Notional amount x Settlement rate x (days in the contract/360)
Settlement amount = 4,000,000 x 1.25% x (90/360)
Settlement amount = $12,330.46

Since the FRA was bought at 6.75% and the settlement rate is lower at 5.50%, the buyer of the FRA would need to pay the settlement amount of $12,330.46 to the counterparty at maturity, making the correct answer B.

You Bought a USD 4,000,000 6x9 FRA at 6