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2) Company A agrees to enter into an FRA agreement with Company B in which Company A borrows $ 40,000,000 in 6-month time for a
2) Company A agrees to enter into an FRA agreement with Company B in which Company A borrows $ 40,000,000 in 6-month time for a period of 9 months, and Company B invests $ 40,000,000 in 6-month time for a period of 9 months. The 6- month interest rate is 0.77% per annum and the 9-month interest rate is 0.89% per annum. (i). (ii). What is the interest rate that both companies agreed upon? [1 mark] Suppose that at the expiry date of the FRA, the 6-month interest rate is 0.81% per annum and the 9-month interest rate is 0.96% per annum, calculate the compensatory payment and which party receives it? [2 marks] (iii). Suppose that at the expiry date of the FRA, the 6-month interest rate is 0.79% per annum and the 9-month interest rate is 0.86% per annum, calculate the compensatory payment and which party receives it? [2 marks]
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