Sumitomo Bank sells a "three against nine" USD15,000,000 Forward Rate Agreement (FRA) for a 6-month period beginning 3 months from today and ending 9 months from today.
The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a 3-month Eurodollar loan and having accepted a 9-month Eurodollar deposit. The settlement rate with the buyer is 5 percent.
There are actually 180 days in the 6-month FRA period. Assume that 3 months from today the actual rate is 4.35 percent.
Determine how much the FRA is worth and discuss who will pay whom --the buyer pays the seller or the seller pays the buyer. Show all calculations.