The Exim Company has entered into a 3 month,$250 million notional principal forward rate agreement (FRA)with What-a-Bank.The terms are such that Exim will pay What-a-Bank if LIBOR is above 2%,but What-a-Bank will pay Exim if LIBOR is below 2%.Based on the standard FRA formula,who will pay and how much,if LIBOR is 1.625% in three months?

Question

Quizplus · Accepted Answer

What-a-Bank will pay Exim because the LIBOR rate is below 2%. The payment is calculated using the FRA formula: Payment = Notional Principal x (Agreed Rate - LIBOR) x (Days in Contract Period/360). Given the information, the correct calculation results in What-a-Bank paying Exim $233,427.

The Exim Company Has Entered into a 3 Month,$250 Million