A company will need to 'roll over' its existing $500 000 funding arrangement in two months' time for a further 90 days.It is concerned that interest rates in the short-term debt market may rise in the mean time,and decides to manage the risk exposure by entering into a forward rate agreement with its bank.The bank quotes a price (2Mv5M)of 9.45 to 30.In two months' time the reference rate (BBSW)is 10.20% per annum.Calculate the settlement amount.
A) $881.43
B) $1058.10
C) $1423.80
D) $3750.00

Question

Quizplus · Accepted Answer

The settlement amount is calculated as follows:Settlement amount = Notional amount * (Forward rate - Reference rate) * TimeNotional amount = $500,000Forward rate = 9.45%Reference rate = 10.20%Time = 90 days / 360 days = 0.25 yearsSettlement amount = $500,000 * (9.45% - 10.20%) * 0.25 = $881.43

A Company Will Need to 'Roll Over' Its Existing $500