A company buys a 5 * 11 (begins after five months,ends after eleven months),100-million-Eurodollar forward rate agreement (FRA)that has an FRA rate of 4 percent per year.If the six-month bbalibor rate announced after five months is 5.5 percent per year,then (assuming 182 days in the six-month period and 360 days in the year),the buyer will receive on the settlement date (after five months):

Question

Quizplus · Accepted Answer

First, we need to calculate the notional value of the FRA, which is:

Notional value = (FRA rate * Notional amount * Time period in days) / (360)

= (0.04 * 100,000,000 * 182) / 360

= 20,222,222.22

Next, we need to calculate the settlement amount:

Settlement amount = Notional value * (Spot rate - FRA rate) * (Time period in days / 360)

= 20,222,222.22 * (0.055 - 0.04) * (182 / 360)

= $737,817.90

Therefore, the answer is B.

A Company Buys a 5 * 11 (Begins After Five