A bank sells “three against nine” $3,000,000 FRA for six-month period begun three months from today and ending nine months from today. The motive of the FRA is to cover up the interest rate risk occurred by the maturity mismatch from having made three-month Eurodollar loan & having accepted a nine-month Eurodollar deposit. The agreement rate along the buyer is 5.5 %. In fact there are 183 days in the six-month period. Assume that three months from now the settlement rate is 6 1/8 percent. Calculate approximately how much the FRA is worth & who pays whom the buyer pays the seller or the seller pays the buyer.
Since the settlement rate is greater than the agreement rate, the seller pays the buyer the absolute value of the FRA. The absolute value of the FRA is:
$3,000,000 x [(.06125-.055) x 183/360]/[1 + (.06125 x 183/360)]
= $3,000,000 x [.006250/(1.031135)]
= $18,183.85.