Explanation:
The FRA's payoff will take place in the ninth month. The net payoff will be the difference between the receipt of the fixed rate of 7% and the floating rate payment. As given in the question, if the floating rate is 6.8% in six months, the payoff at the end of the ninth month is calculated as:
Payoff = Principal × (Fixed rate − Floating rate) × Time
= $50,000,000 × (0.07 − 0.068) × 0.25
= $25,000
Although any interest should be due at the end of the FRA period (e.g., 9 months in this question), the common practice is for the FRA to be settled at the beginning of the FRA period or rather as soon as the floating rate becomes known. Therefore, we can find the payoff at the end of the sixth month by discounting any payoffs for three months, with the floating rate as the discount rate.
Payoff = $25,000 / (1 + 0.068/4) = $24,582
Since the payoff is positive, Beijing Shipping Corp. will receive a cash inflow of $24,582 at the six-month point.
Q.657 Beijing Shipping Corp. enters into a forward rate agreement with Geneva Bank to receive a 7% fixed rate on the principal of $50 million based on a three-month rate beginning in six-month time. If the three-month rate in six-month time is 6.8%, then what is the cash inflow/outflow for the Beijing Shipping at the end of the sixth month?
A
Cash outflow of $25,000.
B
Cash inflow of $24,582.
C
Cash outflow of $24,500.
D
Cash outflow of $24,582.
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