Answered step by step
Verified Expert Solution
Question
1 Approved Answer
In mid April, JK Ltd reviews the 69 FRA that it entered into 3 months ago as the payfixed/receive-floating party. The FRA rate is 0.70%
In mid April, JK Ltd reviews the 69 FRA that it entered into 3 months ago as the payfixed/receive-floating party. The FRA rate is 0.70% p.a. and the notional amount of the FRA is $20,000,000. The FRA contract follows the standard US settlement terms (NOT the Australasian terms). Three months later (i.e., in mid July), the 69 FRA reaches expiration, at which time the threemonth Libor rate is 1.10% p.a. and the six-month Libor rate is 1.20% p.a. JK determines that the appropriate discount rate for the FRA settlement cash flow is 1.10% p.a. Ignore the day count convention, and assume that three-, six-, and nine-month FRA and Libor rates apply to periods correspond to 1/4,1/2, and 3/4 of a year (i.e., 1/4, 1/2, and 3/4 of 365 days), respectively. None of the rates quoted above are continuous compound rates. Required: (a). Based on the information above, explain whether JK Ltd makes a gain or loss by showing the settlement amount for JK Ltd to settle the 69FRA at expiration (round to 2 decimal places). (b). Based on the market information in mid July, explain what should be 36 FRA rate if JK Ltd enters into a new FRA at that time. Report your answer in percentage (\%) with 4dps. In mid April, JK Ltd reviews the 69 FRA that it entered into 3 months ago as the payfixed/receive-floating party. The FRA rate is 0.70% p.a. and the notional amount of the FRA is $20,000,000. The FRA contract follows the standard US settlement terms (NOT the Australasian terms). Three months later (i.e., in mid July), the 69 FRA reaches expiration, at which time the threemonth Libor rate is 1.10% p.a. and the six-month Libor rate is 1.20% p.a. JK determines that the appropriate discount rate for the FRA settlement cash flow is 1.10% p.a. Ignore the day count convention, and assume that three-, six-, and nine-month FRA and Libor rates apply to periods correspond to 1/4,1/2, and 3/4 of a year (i.e., 1/4, 1/2, and 3/4 of 365 days), respectively. None of the rates quoted above are continuous compound rates. Required: (a). Based on the information above, explain whether JK Ltd makes a gain or loss by showing the settlement amount for JK Ltd to settle the 69FRA at expiration (round to 2 decimal places). (b). Based on the market information in mid July, explain what should be 36 FRA rate if JK Ltd enters into a new FRA at that time. Report your answer in percentage (\%) with 4dps
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started