You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3 percent.Suppose at the maturity of the FRA,the correct interest rate is 3.5 percent.Clearly you are better off since you have the ability to borrow $10,000,000 for 3 months at 3 percent instead of 3.5 percent.What is the payoff at the maturity of the FRA?

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Quizplus · Accepted Answer

The payoff from the FRA can be calculated as the difference between the interest amounts at the agreed rate and the market rate at maturity, discounted back to the present value. The calculation is as follows: $$Payoff = \frac{Principal \times (Market\ Rate - FRA\ Rate) \times (Days/360)}{1 + Market\ Rate \times (Days/360)}$$ Substituting the given values: $$Payoff = \frac{$10,000,000 \times (0.035 - 0.03) \times (90/360)}{1 + 0.035 \times (90/360)} = $12,391.57$$ This results in a net payment of $12,391.57 to you.

You Entered in to a 3 × 6 Forward Rate