You are a bank and your customer asks you to quote an agreed-upon rate for a 3 × 6 FRA. You observe the following rates: What rate should you quote?

Question

You are a bank and your customer asks you to quote an agreed-upon rate for a 3 × 6 FRA. You observe the following rates:  What rate should you quote?

Quizplus · Accepted Answer

The 3x6 FRA means the contract starts in 3 months and ends in 6 months. Looking at the rates provided, the 3-month rate is 4.80% and the 6-month rate is 5.12%. To quote an agreed-upon rate for a 3x6 FRA, we need to find the rate that would have applied if we had entered into the agreement 3 months ago, for a period of 3 months. This can be calculated by taking the difference between the 6-month rate and the 3-month rate, and dividing by 100. In this case, (5.12% - 4.80%) / 100 = 0.0032. Multiplying this by (90/360), the forward rate period, gives us a rate of 0.008%. Adding this to the 3-month rate gives us the rate we should quote, which is 4.80% + 0.008% = 4.96%. Therefore, the best choice is B.

You Are a Bank and Your Customer Asks You to Quote