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
x
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 =
( 4% - 3.50% x 5000000 x 180
3.50% )(
x
1
1 + 4% x

( )(
in three years' time, on the
principal amount. The agreement 0.5% x 5,000,000 x 180 1
will be settled in cash in a FRAP = x
payment made at the beginning of 360 1 + 4% x
the forward period, discounted by
an amount calculated using the FRAP = 12500 x 0.980392156862745
contract rate and the contract
period.
FRAP = $ 12,254.90
 INPUT DETAILS HERE:
R 4%
NP 5000000
P 180
Y 360
1
(P/Y) ) FRA 3.50%

1
0.5 )
1
0.5 )
0.980392156862745
Swaps
Step 1: Compute for the annualized swap rate and the quarterly fixed INPUT 1ST LIBOR HERE:
swap payment. 3 months 0.99942
1 - DFn 6 months 0.99838
C= F x
∑DFi 9 months 0.99663
Annualized swap rate

1 - 0.99425 12 months 0.99425

C= 4 x
3.98868 ∑ 3.98868
0.00575000000000003
C= 4 x
3.98868 INPUT DETAILS HERE:
F 4
C= 4 x 0.00144157967046743
NP 2500000000
C= 0.00576631868186972
C= 0.005770000
Quarterly fixed swap

ASR
QFSP = X NP
F
0.005770000
QFSP = X 2,500,000,000
4
QFSP = 0.0014425 x 2,500,000,000
QFSP = 3,606,250.00
INPUT 2ND DF HERE:
Step 2: Compute for the First Floating Payment.
3 months 0.233%
First LIBOR 6 months 0.325%
FFP = x NP
F 9 months 0.451%
First Floating
Payment

0.23% 12 months 0.578%

FFP = x 2500000000
4 ∑ 1.587%
FFP = 0.06% x 2500000000
FFP = 1,456,250.00
INPUT 2ND LIBOR HERE:
Step 3: Followed by the value of Fixed Rate Investment.
3 months 0.99972
Vfix = QFSP (∑DF) + NP x DFn 6 months 0.99859
Investment
Fixed Rate

Vfix = 3606250 3.98949 2485950000 9 months 0.9968

value of

Vfix = 14387098.3125 + 2485950000 12 months 0.99438

Vfix = 2,500,337,098.31 ∑ 3.98949
Step 4: Followed by the value of Floating Rate Investment.

Vfl = FFP+ NP x DF1

Investment

Vfl = 1,456,250.00 2500000000 x 0.99972

value of
Floating

Vfl = 2501456250 x 0.99972

Rate

Vfl = 2,500,755,842.25
Step 5: Find the value of the Swap

VSwap = Vfix - Vfl

Value of
Swap
 Value of
VSwap = 2,500,337,098.31 - 2,500,755,842.25
Swap VSwap = (418,743.94)
Note: negative swap value = decrease in the fixed cash flow is higher
than the decrease in the value of floating cash flow
Interest Rate Caps and Floors

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

Cap Settlement
Amount = ( 3.5 -
100
3
) x 1,000,000 x
90
360

Cap Settlement
Amount = ( 0.5
100 ) x 1,000,000 x 0.25

Cap Settlement
Amount = ( 0.005 ) x 1,000,000 x 0.25

Cap Settlement
Amount = ( 0.00500 ) x 250,000

Cap Settlement = 1250

Amount
 Input Details Here:
Cap Strike Rate 3
Floor Strike Rate 2
Notional Amount 1,000,000 NOTE: WHOLE NUMBER FOR
Benchmark Rate, 1 3.5 THE PERCENTAGES
Benchmark Rate, 2 2.5
Benchmark Rate, 3 1.5
Number of Days 90

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 = 0.95 x ( 3%
6% ) Conversion Matrix
1 Barrel =

MVHR = 0.95 x ( 50.0% )

MVHR = 0.475
Step 2: How much would be the optimal number of contract?
Conversion
Gallons = Contract Size x Conversion
Gallons = 314.49 42
Gallons = 13208.58

Optimal Number of Contracts

Contracts = MVRH x NP / CS
Contracts = 0.475 15000000 13208.58
Contracts = 7125000 13208.58
Contracts = 539.422102905839
 INPUT DETAILS HERE:
Correlation between 3 DECIMAL POINTS SA
Spots and Futures 0.95 MINIMUM VARIANCE HEDGE
RATIO
SD Spot 3%
SD Futures 6%
Gallons 15000000
Contract Size 314.49

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
181
Premium or Discount = 0.7194 x 0.0125 x
360

Premium or Discount = 0.7194 x 0.0125 x 0.502777777777778

Premium or Discount = 0.00452122916666667

Premium or Discount = 0.0045

Forward Exchange Rate

FER = Premium + Exchange Rate
FER = 0.0045 0.7194
FER= 0.7239
 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 181
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 comm
= 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

ontract 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