Suppose today is March 15 and an investor enters into a long 4 x 7 FRA where the

floating rate is three month Libor, the principal amount is P = INR 50, 00,000, and the
fixed rate is k= 5 %. The investment period in the FRA begins on July 15 (four months
from today) and ends on October 15 (seven months from today), which is 92 days.
Compute the payoffs from the FRA

Suppose the actual three-month Libor rate that prevails on July 15 is L = 5.4%
The difference L - k is 0.4 %. Applying this difference to the principal amount of IN 50,00,000
for 92 days results in 0.004*92/360*5000000 = 5111.11

This amount must be brought back to July 15. To do so, we discount it at the threee-month
Libor rate prevailing on July 15. This gives us: 5111.11/(1+(0.054)*92/360) = 5041.54
This is the amount the investor receives from the short position on July 15
 FRA
INR 3x6 FRA 6x9 FRA 3x9 FRA
A 100 Crore
T=0 T=3 T=6 T=9
Int=?
Int = 8% PA 3 months from now I need 100 crore for 3 months thereafter

Zero Rate/Treasury rate Zero

Forward Rate 3-mon zero = 5% pa
0.0125

91-day t-bill rate is 4% 6-m zero

4% per annum 6-month spot rate
Nominal Rate
Effective rate
any rate is always mentioned on a per annum basis

2.5
0R3
Zero rate Forward rate 0R6
Spot rate 3R6

Spot rate are available for different maturities

T=0 2% 2.50% 3% 3.20% 3.50%
3m 6m 12 m 2y 2.5 y

Yield curve
Term structure of interest rates in the economy
T=12

3 month spot
6 month spot
3 month forward rate

4% 7%
10 y 20 y