From the following AUD rates: 3M AUD (91-day) deposits 2.35% 3x6 AUD (90-day) FRA 2.55% Calculate the 6-month implied cash rate.
A) 2.37%
B) 2.46%
C) 2.55%
D) 4.90%

Question

From the following AUD rates: 3M AUD (91-day) deposits     2.35% 3x6 AUD (90-day) FRA     2.55% Calculate the 6-month implied cash rate.
A) 2.37%
B) 2.46%
C) 2.55%
D) 4.90%

Quizplus · Accepted Answer

To calculate the implied cash rate, we need to first find the 3-month rate for the second leg of the FRA. We can do this by using the formula:

FRA rate = [(R2 - R1) x (t2 - t1) / (1 - R2 x (t2 - t1))] x (365 / t2)

Where:
R1 = 3M deposit rate = 2.35%
R2 = Unknown 3-month rate
t1 = Days in the deposit = 91/365
t2 = Days in the FRA = 90/365

Plugging in the numbers, we get:

2.55% = [(R2 - 2.35%) x (90/365 - 91/365) / (1 - R2 x (90/365 - 91/365))] x (365 / 90)

Solving for R2, we get:

R2 = 2.94%

Now that we have the 3-month rate for the second leg of the FRA, we can calculate the implied 6-month cash rate using the formula:

Implied 6-month rate = [((1 + R1 x (91/365)) x (1 + R2 x (90/365)))^(365/180) - 1]

Plugging in the numbers, we get:

Implied 6-month rate = [((1 + 2.35% x (91/365)) x (1 + 2.94% x (90/365)))^(365/180) - 1] = 2.46%

Therefore, the answer is B, 2.46%.

From the Following AUD Rates: 3M AUD (91-Day) Deposits 2