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The 4 month interest rate in AUD is 4.25% p.a. and the 15 month AUD interest rate is 5.125%. Calculate the 4 x 15 FRA.

The 4 month interest rate in AUD is 4.25% p.a. and the 15 month AUD interest rate is 5.125%. Calculate the 4 x 15 FRA.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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The 4 month interest rate in AUD is 4.25% p.a. and the 15 month AUD interest rate is 5.125%. Calculate the 4 x 15 FRA.

Expert Solution
Step 1: Overview

To calculate the Forward Rate Agreement (FRA) for a 4x15 FRA, use the following formula:

F R A space R a t e space equals fraction numerator left parenthesis R 2 space minus space R 1 right parenthesis over denominator left parenthesis 1 space plus space R 1 space asterisk times space left parenthesis N 2 space minus space N 1 right parenthesis right parenthesis end fraction

Where:

  • R1 is the interest rate for the shorter period (4 months) in decimal form (4.25% p.a. = 0.0425).
  • R2 is the interest rate for the longer period (15 months) in decimal form (5.125% p.a. = 0.05125).
  • N1 is the duration of the shorter period in years (4 months = 4/12 years).
  • N2 is the duration of the longer period in years (15 months = 15/12 years).
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