Forward Rate Agreements (FRAs) are financial instruments that allow parties to lock in a future interest rate. In this article, we will explore some ejercicios resueltos de forward rate agreement to help you better understand how they work.
Ejercicio 1:
A company needs to borrow $1 million in six months and wants to hedge against rising interest rates. The current 6-month LIBOR rate is 2%, but the company is concerned that it may rise to 3% by the time they need to borrow. The company enters into a 6-month FRA with a bank, agreeing to a fixed rate of 3%. The notional amount of the FRA is $1 million.
a) Calculate the settlement amount if the 6-month LIBOR rate is 3.5% at the settlement date.
b) Calculate the settlement amount if the 6-month LIBOR rate is 2.5% at the settlement date.
Solution:
a) The settlement amount is calculated as follows:
Notional amount x (FRA fixed rate – LIBOR rate at settlement date) x (FRA contract length / 360)
$1,000,000 x (3% – 3.5%) x (6/360) = -$8,333.33
Since the LIBOR rate is higher than the fixed rate agreed upon in the FRA, the company would receive a payment of $8,333.33 from the bank.
b) The settlement amount is calculated as follows:
Notional amount x (FRA fixed rate – LIBOR rate at settlement date) x (FRA contract length / 360)
$1,000,000 x (3% – 2.5%) x (6/360) = $8,333.33
Since the LIBOR rate is lower than the fixed rate agreed upon in the FRA, the company would have to pay the bank $8,333.33.
Ejercicio 2:
A bank is concerned about falling interest rates and wants to protect its portfolio from losses. The bank enters into a 6-month FRA with a counterparty, agreeing to a fixed rate of 2.5%. The notional amount of the FRA is $5 million.
a) Calculate the settlement amount if the 6-month LIBOR rate is 2% at the settlement date.
b) Calculate the settlement amount if the 6-month LIBOR rate is 3% at the settlement date.
Solution:
a) The settlement amount is calculated as follows:
Notional amount x (FRA fixed rate – LIBOR rate at settlement date) x (FRA contract length / 360)
$5,000,000 x (2.5% – 2%) x (6/360) = $20,833.33
Since the LIBOR rate is lower than the fixed rate agreed upon in the FRA, the counterparty would have to pay the bank $20,833.33.
b) The settlement amount is calculated as follows:
Notional amount x (FRA fixed rate – LIBOR rate at settlement date) x (FRA contract length / 360)
$5,000,000 x (2.5% – 3%) x (6/360) = -$20,833.33
Since the LIBOR rate is higher than the fixed rate agreed upon in the FRA, the bank would have to pay the counterparty $20,833.33.
In conclusion, FRAs are useful financial instruments for managing interest rate risk. By entering into an FRA, parties can lock in a future interest rate and protect themselves from unexpected changes in the market. The above ejercicios resueltos de forward rate agreement showcase how FRAs work in practice and can help you understand how to use them in your own financial planning.