Problem
Your company needs to borrow $10 million in five months' time for a period of six months (180 days). You are concerned that the changes in interest rates will be unfavourable. You approach an FRA dealer, who provides the following forward quotations:
5Mv11M(19): 8.75-8.55
5Mv6M(19): 8.65-8.45
Task
1. What will be the agreed rate if you enter and FRA agreement with this dealer? Explain your answer?
2. Assuming the reference rate on the settlement date is 7.5 per cent, which party to FRA is required to make a payment and why?
3. Calculate the compensation amount on settlement date. Show all calculations?