Assume the following terms for an FRA: Reference rate is three-month LIBOR, the contract rate is 4.5%, the notional amount is for $10 million, and the number of days to settlement is 91 days. If the settlement rate is 5.15%, what compensation or payment must make to the buyer by the seller?

Question

Quizplus · Accepted Answer

To calculate the payment, we need to find the difference between the settlement rate and the contract rate, multiply by the notional amount and adjust for the number of days in the settlement period:

Payment = Notional Amount x (Settlement Rate - Contract Rate) x (Days to Settlement / 360)

Payment = $10,000,000 x (0.0515 - 0.045) x (91/360) = $16,219.45

Therefore, the seller must make a compensation payment of $16,219.45 to the buyer. The closest option is B.

Assume the Following Terms for an FRA: Reference Rate Is