Question #67
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 27
Status: Unattempted
Question
A company has chosen to use a 6 x 9 FRA expiring in 6 months to mitigate the risk of paying a floating coupon on the bond issue. The current term structure for MRR is as follows: Term Interest Rate 180 days 5.65% 270 days 5.95% What is the price of this forward rate agreement (FRA)?
Answer Choices:
A. 3.19%
B. 6.37%
C. $6.37
Explanation
The price of an FRA is the fixed rate. To determine the FRA's fixed rate, the following
formula should be used:
The FRA's fixed rate would be quoted as 6.37%.
The price of an FRA is given as a rate percentage, never as a dollar amount.