Answer: EUR 11,200

## Explanation By convention, an FRA is usually settled at the beginning of the period covered by the FRA. The settlement amount is the present value of the difference in interest amounts with the discount rate being the floating rate. Therefore, the cash flow under the FRA must be discounted back to the beginning of the quarter. ### Step 1: Calculate fixed rate payment Fixed rate payment per quarter = 0.25 × 0.0225 × EUR 10,000,000 = EUR 56,250 ### Step 2: Calculate floating rate payment Floating rate payment at the one year date = 0.25 × 0.018 × EUR 10,000,000 = EUR 45,000 ### Step 3: Calculate net cash flow (undiscounted) Net cash flow = EUR 56,250 - EUR 45,000 = EUR 11,250 (payment by fixed rate payer) ### Step 4: Discount to present value Payment must be discounted at the floating rate: EUR 11,250 / (1 + 0.018/4) = EUR 11,250 / (1 + 0.0045) = EUR 11,250 / 1.0045 = EUR 11,200 **Therefore, the correct cash flow required today to settle the FRA is EUR 11,200.** ### Why other options are incorrect: - **A (EUR 4,975)**: Uses the floating rate at 9 months (2.05%) instead of the current floating rate (1.80%) - **B (EUR 5,000)**: Uses the floating rate at 9 months without discounting - **D (EUR 11,250)**: Correctly calculates the net cash flow but fails to discount it to present value

Author: LeetQuiz .