Forward Rate Agreement

Formula:
Company A enters an FRA with
Company B in which Company A
will receive a fixed (reference) rate
of 4% on a principal amount of $5
FRAP =
( R - FRA x
Y
NP x P
)(
x
1 + R
1

million in one half a year and the

FRA rate will be set at 50 basis Solution by Substitution:
points less than that rate. In
return, Company B will receive the
one-year LIBOR rate, determined
FRAP =
( 3.630% - 2.88% x 6100771 x 270
2.88%
x
)( 1 + 4%
1

( )(
in three years' time, on the
principal amount. The agreement 0.8% x 6,100,771 x 270 1
will be settled in cash in a FRAP = x
payment made at the beginning of 365 1 + 4%
the forward period, discounted by
an amount calculated using the FRAP = 33846.743219 x 0.97385
contract rate and the contract
period.
FRAP = $ 32,961.66
 INPUT DETAILS HERE:
R 3.6300%
NP 6100771
P 270
Y 365
1
x (P/Y) ) FRA 2.88%

1
x 0.739726 )
1
x 0.739726 )
0.97385
Swaps
Step 1: Compute for the annualized swap rate and the quarterly fixed INPUT 1ST LIBOR HERE:
swap payment. 2 months 0.99939
1 - DFn 4 months 0.99866
C= F x
∑DFi 6 months 0.99702
Annualized swap rate

1 - 0.99174 8 months 0.99592

C= 6 x
5.97626 10 months 0.99353
0.00826000000000004 12 months 0.99174
C= 6 x
5.97626 ∑ 5.97626
C= 6 x 0.00138213531539793

C= 0.00829281189238759
C= 0.883 INPUT 2ND DF HERE:
1 months 0.36900%
Quarterly fixed swap

ASR 3 months 0.4020%

QFSP = X NP
F 5 months 0.5970%
0.883000000 7 months 0.6140%
QFSP = X 31,698,002
6 9 months 0.7820%
QFSP = 0.22075 x 31,698,002 11 months 0.8330%
QFSP = 6,997,333.94 ∑ 3.60%
Step 2: Compute for the First Floating Payment.

First LIBOR
FFP = x NP
F
First Floating
Payment

0.36900%
FFP = x 31698002
6
FFP = 0.06150% x 31698002
FFP = 19,494.27
INPUT 2ND DF HERE:
Step 3: Followed by the value of Fixed Rate Investment.
1 months 0.99968
Vfix = QFSP (∑DF) + NP x DFn 3 months 0.9993
Investment
Fixed Rate

Vfix = 6997333.9415 5.97962 31453927.3846 5 months 0.99801

value of

Vfix = 41841397.9832722 + 31453927.3846 7 months 0.99622

Vfix = 73,295,325.37 9 months 0.99411
11 months 0.9923
Step 4: Followed by the value of Floating Rate Investment.
∑ 5.97962
Vfl = FFP+ NP x DF1
Investment

Vfl = 19,494.27 31698002 x 0.99968

value of
Floating

Vfl = 31717496.27123 x 0.99968

Rate

Vfl = 31,707,346.67
Step 5: Find the value of the Swap

VSwap = Vfix - Vfl

Value of
Swap
 Value of
VSwap = 73,295,325.37 - 31,707,346.67
Swap VSwap = 41,587,978.70
Note: negative swap value = decrease in the fixed cash flow is higher
than the decrease in the value of floating cash flow
INPUT DETAILS HERE:
F 6
NP 31698002
Interest Rate Caps and Floors

Cap Settlement
Amount = ( Benchmark Rate - Strike Rate
100 ) x NP x
Number of days
360

Cap Settlement
Amount = ( 4.62 -
100
4.07
) x 790,308 x
87
360

Cap Settlement
Amount = ( 0.55
100 ) x 790,308 x 0.241666666666667

Cap Settlement
Amount = ( 0.0055 ) x 790,308 x 0.241666666666667

Cap Settlement
Amount = ( 0.00550 ) x 190,991

Cap Settlement = 1050.45105

Amount
 Input Details Here:
Cap Strike Rate 4.07
Floor Strike Rate 3.11
Notional Amount 790,308 NOTE: WHOLE NUMBER FOR
Benchmark Rate, 1 4.62 THE PERCENTAGES
Benchmark Rate, 2 3.87
Benchmark Rate, 3 2.1
Number of Days 87

Special Instructions for Caps:

If benchmark rate < cap strike rate Positive Cap Strike Rate -
:a memo stating "no settlement amount Financial institutions sell to the
as cap is out of money" customer

Special Instructions for Floor:

If benchmark rate > floor strike rate Negative Floor Strike Rate -
:a memo stating "no settlement amount Customer sell to the financial
as floor is out of money" institutions
 INPUT DETAILS HERE:
Minimum Variance Hedge Ratio Correlation between
Spots and Futures
SD Spot
Step 1: Compute for the minimum variance hedge ratio SD Futures
MVHR =
Correlation between Spots and
Futures
x ( SD Spot
SD Futures ) Gallons
Contract Size
Minimum Variance
Hedge Ratio

MVHR = 0.9412 x ( 5%
0% ) Conversion Matrix
1 Barrel =

MVHR = 0.9412 x ( #DIV/0! )

MVHR = 0.611
Step 2: How much would be the optimal number of contract?
Conversion
Gallons = Contract Size x Conversion
Gallons = 9699 42
Gallons = 407358

Optimal Number of Contracts

Contracts = MVRH x NP / CS
Contracts = 0.611 3685101 407358
Contracts = 2251596.711 407358
Contracts = 5.52731678523559
 INPUT DETAILS HERE:
Correlation between 3 DECIMAL POINTS SA
Spots and Futures 0.9412 MINIMUM VARIANCE HEDGE
RATIO
SD Spot 4.99%
SD Futures
Gallons 3685101
Contract Size 9699

Conversion Matrix
42 Gallons
 INPUT DETAILS HER
FOREX HEDGING Base Currency
Quoted Currency
Exchange Rate
Interest Rate Quoted Date of contract
- Base Currency
Currency
Interest Rate

Differential =
Differential

Interest Rate 3.75 - 2.5

Differential = (In percentage, convert to
decimal in the
Interest Rate 1.25 Premium/Discount below)
Differential =

Premium or Discount
Exchange Date of Contract duration
x Interest Rate x
Premium or Discount = Rates Differential 360
90
Premium or Discount = 0.7194 x 0.0125 x
360

Premium or Discount = 0.7194 x 0.0125 x 0.25

Premium or Discount = 0.002248125

Premium or Discount = 0.0190000

Forward Exchange Rate

FER = Premium + Exchange Rate
FER = 0.019 0.7194
FER= 0.7384
 INPUT DETAILS HERE: BASE QUOTED
Base Currency 2.5 USD > EURO DISCOUNT
Quoted Currency 3.75 USD < EURO PREMIUM
Exchange Rate 0.7194
Date of contract 90
HEDGE ACCOUNTING

1.4402 - 1.3697 * 3,971,258.00 = 279,973.689 *

279,973.689000 -

277,411.92974565 +

1.3697 - 1.2771 * 3,971,258.00 = 367,738.4908 *

367,738.4908 -

364,373.68360918 +

1.4038 - 1.3697 * 3,971,258.00 = 135,419.8978 -

1.4038 - 1.2771 * 3,971,258.00 = 503,158.3886 -

1.2771 * 3,971,258.00 = 5,071,693.5918

1.4038 * 3,971,258.00 = 5,574,851.9804

1.4038 - 1.3697 * 3,971,258.00 = 135,419.8978

 0.00498

2 * 0.0549 2561.75925435000

2,561.7592543500 = 277,411.92974565

25.515122173326 = 277,437.4448678230

2 * 0.0549 3,364.80719082

3,364.80719082 = 364,373.68360918

33.5134796205672 = 364,407.197088801

277437.444867823 = (142,017.547067823)

364,407.197088801 = 138,751.191511199
11/1/2015 No entries, since neither the forward contract nor the firm commitm

12/31/2015 Forward Currency Contract

Gain on Forward Contract

Loss on Firm Purchase Commitment

Firm Commitment Obligation

Gain on Forward Contract

Profit and Loss Summary
Loss on Firm Purchase Commitment

4/30/2016 Loss on Forward Contract

Forward Currency Contract

Loss on Firm Purchase Commitment

Firm Commitment Obligation

Firm Commitment Obligation

Machinery and Equipment
Cash

Cash
Forward Contract

Profit and Loss Summary

Loss on Firm Purchase Commitment
Loss on Forward Contract

ANSWERS:

1 no value
2 no value
3 5,071,693.5918
4 503,158.3886
5 280,768.738579022
act nor the firm commitment have value on this date

277437.444867823
277437.444867823

364,407.197088801
364,407.197088801

277437.444867823
86,969.7522209773
364,407.197088801

142,017.547067823
142,017.547067823

138,751.191511199
138,751.191511199

503,158.3886
5,071,693.5918
5,574,851.9804

135,419.8978
135,419.8978

280,768.738579022
138,751.191511199
142,017.547067823

7,278,061.19440347
7278061.19440347
 GIVEN
NOTIONAL PRINCIPAL 3,971,258.00
TIME VALUE 0.498% PER MONTH
NOMINAL 5.49% ANNUAL

SPOT RATE
MONTHS DAYS 11/1/2015 1.2771
2 60 12/31/2015 1.3697
4.033333 121 4/30/2016 1.4038

FORWARD RATE
11/1/2015 1.3697
4/30/2016 1.4402

MACHINERY & EQUIPMENT

CASH
Firm Commitment Obligation
 1.4402 - 1.3697 = 0.0705 * 3,971,258.00
1.3697 - 1.2771 = 0.0926 * 3,971,258.00

PV of Change 0.498% monthly (5.49% per annum)

0.498% 2 0.00996

Annual Nominal rate 5.49%

P - no. of Days 60
Y- no/ of days per year 360

1.00915
PV/Discount Factor 0.99093
or calculated as 1/1.00915 277,435.16

PV of Change 0.498% monthly (5.49% per annum)

0.498% 2 0.00996

Annual Nominal rate 5.49%

P - no. of Days 60
Y- no/ of days per year 360

1.00915
PV/Discount Factor 0.99093
or calculated as 1/1.00915 364,404.19

0.0341 * 3,971,258.00 = 135,419.90 - 277,435.16

0.1267 * 3,971,258.00 = 503,158.39 - 364,404.19
1.2771 * 3,971,258.00 = 5,071,693.59
1.4038 * 3,971,258.00 = 5,574,851.98
5,574,851.98 - 5,071,693.59 = 503,158.39
0.0341 * 3,971,258.00 = 135,419.90
 DATE

= 279,973.69 11/1/2015 No entries, since neither the forward contract nor the firm com
= 367,738.49
12/31/2015 Forward Currency Contract
Gain on Forward Contract

Loss on Firm Purchase Commitment

Firm Commitment Obligation

Gain on Forward Contract

Profit and Loss Summary
Loss on Firm Purchase Commitment

4/30/2016 Loss on Forward Contract

Forward Currency Contract

Loss on Firm Purchase Commitment

Firm Commitment Obligation

Firm Commitment Obligation

Machinery and Equipment
Cash

Cash
Forward Contract

Profit and Loss Summary

- 142,015.26 Loss on Firm Purchase Commitment
138,754.20 Loss on Forward Contract
 DR CR

contract nor the firm commitment have value on this date

277,435.16
277,435.16

364,404.19
364,404.19

277,435.16
86,969.04
364,404.19

142,015.26
142,015.26

138,754.20
138,754.20

503,158.39
5,071,693.59
5,574,851.98

135,419.90
135,419.90

280,769.46
138,754.20
142,015.26

7,278,054.33 7,278,054.33