Calculate compensation amount on the settlement date

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Our company needs to borrow $5 million in three months' time for a period of 6 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:

3Mv9M(19): 9.75-8.55

3Mv6M(19): 9.65-8.45

What will be the agreed rate if you enter an FRA agreement with this dealer? Explain your answer.

b) Assuming the reference rate on the settlement date is 10 per cent, which party to the FRA is required to make a payment and why?

c) Calculate the compensation amount on the settlement date. Show all calculations.

d) List and briefly explain two advantages and two disadvantages of FRAs.

Reference no: EM133059953

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