Advanced Financial Management (AFM)MCQQuestion 5886 of 506
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A corporate borrower enters into a 3x9 Forward Rate Agreement (FRA) at 6.50% p.a. for a notional principal of ₹50 crores. At settlement date (end of month 3), 6-month MIBOR fixes at 7.25% p.a. Compute the settlement compensation amount payable to the borrower (assume 360 days per year, 180 days in period).

Select Your Answer (Keyboard: A, B, C, D)
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Correct Answer

✅ Option A — ₹18,10,742

All Options:

  • A₹18,10,742 ✓
  • B₹18,75,000
  • C₹18,09,407
  • D₹19,25,000

Detailed Solution & Explanation

Settlement of Forward Rate Agreement (FRA):
1. **Parameters**: Notional N=₹50,00,00,000\displaystyle N = ₹50,00,00,000, Contract Rate RK=6.50%\displaystyle R_K = 6.50\%, Settlement Rate R=7.25%\displaystyle R = 7.25\%, Period d=180 days\displaystyle d = 180 days\displaystyle \text{ days}.
2. **Interest Differential**:
ΔR=7.25%−6.50%=0.75%Δ\displaystyle \Delta R = 7.25\% - 6.50\% = 0.75\%
3. **Discounted Present Value of Compensation at Settlement Date**:
Settlement=N×(R−RK)×d3601+R×d360\displaystyle \text{Settlement} = \frac{N ×\displaystyle \times (R - R_K) ×\displaystyle \times d360\displaystyle \frac{d}{360}}{1 + R ×\displaystyle \times d360\displaystyle \frac{d}{360}}
Numerator=50,00,00,000×0.0075×180360=₹18,75,000Numerator=50\displaystyle \text{Numerator} = 50,00,00,000 ×\displaystyle \times 0.0075 ×\displaystyle \times 180360\displaystyle \frac{180}{360} = ₹18,75,000
Denominator=1+(0.0725×180360)=1+0.03625=1.03625\displaystyle \text{Denominator} = 1 + \left(0.0725 ×\displaystyle \times 180360\displaystyle \frac{180}{360}\right) = 1 + 0.03625 = 1.03625
Compensation=18,75,0001.03625=₹18,09,409≈₹18,09,407\displaystyle \text{Compensation} = \frac{18,75,000}{1.03625} = ₹18,09,409 ≈\displaystyle \approx ₹18,09,407
Hence, **Option C** is the correct answer.

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