ACCA AFM Syllabus E. Treasury And Advanced Risk Management Techniques - Forward rate agreements (FRA) - Notes ^{5 / 13}

FRAs are over-the counter transaction between a bank and a company.

The bank quotes two-way prices for each FRA period for each borrowing (loan) or lending (deposit).

An example of bank quotations for FRA:

• 3 v 6     5.25 - 7.00

  Means forward rate agreement that start in 3 months and last for 3 months at a borrowing rate of 7% and lending rate of 5.25%.

Example

A bank has quoted the following FRA rates:

Assume that now is 1st October 2013.

Required:

Determine the FRA interest applicable to the following situations:

1. A company wants to borrow on 1st February 2014 and repay the loan on 1st of April 2014.

2. A company wants to deposit money on 1st December 2013 and expect to withdraw the amount for an investment on 1st of May 2014.

3. A company wants to borrow on 1st January 2014 and repay the loan on 1st of March 2014


Solution

1. 4 v 6 at a borrowing rate of 6.35%

2. 2 v 7 at lending rate of 5.25%

3. 3 v 5 at a borrowing rate of 7.00%