You bought a EUR 8,000,000 6x9 FRA at 4.50%. The settlement rate is 3-month (90-day) EURIBOR, which is fixed at 3.50%. What is the settlement amount at maturity?
A) You pay EUR 20,000.00
B) You receive EUR 20,000.00
C) You pay EUR 19,826.52
D) You receive EUR 19,826.52

Question

Quizplus · Accepted Answer

To calculate the settlement amount, first we need to determine the value of the underlying interest rate (i.e. the rate that the FRA is based on), which is the difference between the fixed rate in the FRA contract and the settlement rate. In this case, the value of the underlying interest rate is:
4.50% - 3.50% = 1.00%
Next, we need to determine the settlement amount, which is calculated by multiplying the notional amount of the FRA by the underlying interest rate and adjusting for the number of days in the FRA contract. In this case, the settlement amount is:
EUR 8,000,000 x (1.00% / 4) x (90 / 360) = EUR 20,000
However, because the fixed rate in the FRA contract is higher than the settlement rate, the buyer of the FRA (i.e. you) would have to pay this settlement amount to the seller of the FRA. Therefore, the correct answer is C, "You pay EUR 19,826.52" (assuming that there is no rounding involved in the calculation of the settlement amount).

You Bought a EUR 8,000,000 6x9 FRA at 4