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PRMIA Exam 8006 Topic 9 Question 102 Discussion

Actual exam question for PRMIA's 8006 exam
Question #: 102
Topic #: 9
[All 8006 Questions]

Calculate the settlement amount for a buyer of a 3 x 6 FRA with a notional of $1m and contract rate of 5%. Assume settlement rate is 6%.

Show Suggested Answer Hide Answer
Suggested Answer: C

An m x n FRA is an agreement to borrow money for a period starting at time m and ending at time n at the contracted rate. Therefore, the buyer of the 3 x 6 FRA has committed to borrow $1m at the beginning of 3 months and return it at the end of 6 months, ie a total borrowing period of 3 months at a rate of 5%. Of course, the $1m is never actually exchanged, and at the beginning of the 3 month period when the next three months' interest rate is known (6%), the parties merely exchange the difference in the interest. SInce this interest was only due at the end of the 6 months and is being exchanged at the 3 month time point, it will have to be discounted to its present value.

The correct answer to this question is =(1,000,000 * (6% - 5%) * 3/12)/(1 + (6%*3/12))=$2463.05. Since interest rates rose, the borrower gained as he has the right to borrow at a lower rate, and therefore the seller will pay the borrower.

(Here:

- $1m is the notional

- 6% - 5% represents the difference between the contracted and the realized interest rates

- 3/12 is the 3 month period from month 3 to 6

- Finally, we divide by the current interest rate for 3 months to present value the payment from month 6 to month 3)


Contribute your Thoughts:

Pamella
4 months ago
Ah, the old 'FRA' conundrum. I bet the exam writers thought they were being so clever with this one. But fear not, my friends! With a little bit of FRA-nchise, we can crack this case wide open. The answer is clearly C) Receive $2,463. Piece of cake!
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Melissia
3 months ago
Let's double check the calculations just to be sure.
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Jerlene
3 months ago
No, I'm pretty confident it's C) Receive $2463.
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Twila
3 months ago
Are you sure? I calculated it as D) Pay $9434.
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Kattie
3 months ago
I think the answer is C) Receive $2463.
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Devorah
4 months ago
Alright, time to put on my thinking cap. Let's see... If the buyer is receiving the difference, that would be A) Receive $9,434. But wait, what if the buyer is paying the difference? Hmm, this is a tough one. I should probably just go with my gut on this one.
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Jacquelyne
4 months ago
Wait, wait, wait. If the contract rate is 5% and the settlement rate is 6%, doesn't that mean the buyer is paying the difference? So the answer should be B) Pay $2,463. I'm pretty sure I've got this one figured out.
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Ollie
3 months ago
Yep, the buyer would have to pay $2,463 in this situation.
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Nichelle
4 months ago
That makes sense, the buyer would pay the difference in this case.
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Marisha
4 months ago
So the answer should be B) Pay $2,463.
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Tenesha
4 months ago
I think you're right, the buyer would pay the difference between the contract rate and the settlement rate.
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Andrew
4 months ago
Ooh, this is tricky! I'm going to have to break out my calculator for this one. Let me see... Okay, got it! The answer is C) Receive $2,463. The buyer is receiving the difference between the contract rate and the settlement rate, so that makes sense.
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Delfina
3 months ago
That makes sense. So the buyer would receive $2463 in this case.
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Tamesha
3 months ago
Yes, that's correct. The buyer benefits from the difference in rates.
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Amber
3 months ago
I think the answer is C) Receive $2463. The buyer receives the difference between the contract rate and the settlement rate.
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Truman
5 months ago
Hmm, I'm not so sure about that. Isn't the buyer supposed to pay the difference? In that case, the answer would be D) Pay $9,434. I might need to double-check my calculations on this one.
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Roxanne
4 months ago
Definitely, accuracy is key when dealing with settlement amounts.
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Denise
4 months ago
It's always good to double-check calculations when it comes to financial transactions.
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Desiree
4 months ago
Yes, the buyer would pay $9,434 in this scenario.
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Lovetta
4 months ago
I think you're right, the buyer would pay the difference in this case.
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Eladia
5 months ago
I agree with Melinda. The buyer of the FRA would have to pay the difference between the contract rate and the settlement rate.
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Nikita
5 months ago
Okay, let's see if I can wrap my head around this. The settlement amount is based on the difference between the contract rate and the settlement rate, right? So if the contract rate is 5% and the settlement rate is 6%, that means the buyer is receiving the difference, which is 1%. Multiplying that by the notional of $1m, we get $9,434. Nice!
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Alfreda
4 months ago
No problem, happy to help!
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Kassandra
4 months ago
Got it, thanks for the explanation!
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Lorrie
4 months ago
So, the correct answer is A) Receive $9434.
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Johanna
4 months ago
That's correct! The buyer would receive $9,434 as the settlement amount.
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Glory
4 months ago
D) Pay $9434
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Aretha
4 months ago
That's correct! The buyer will receive $9,434 as the settlement amount.
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Beckie
4 months ago
A) Receive $9434
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Melinda
5 months ago
I think the answer is D) Pay $9434.
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