You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3%. Suppose at the maturity of the FRA, the correct interest rate is 3½%. Clearly you are better off since you have the ability to borrow $10,000,000 for 3 months at 3% instead of 3½%. What is the payoff at the maturity of the FRA?

Question

Quizplus · Accepted Answer

The payoff is calculated as the difference in interest costs: ($10,000,000 * (3.5% - 3%) * (3/12)) / (1 + 3.5% * (3/12)) = $12,391.57.

You Entered in to a 3 × 6 Forward Rate