If the three-month (91 days) Libor rate is 4% and the six-month (183 days) rate is 5%, what should be the 3°ø6 FRA rate? If, at the end of the contract, the three-month Libor rate turns out to be 5%, what should the settlement amount be?
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To calculate the 3x6 FRA rate, you subtract the three-month Libor rate from the six-month Libor rate.
3x6 FRA rate = 6-month Libor rate - 3-month Libor rate
= 5% - 4%
= 1%
Therefore, the 3°ø6 FRA rate should be 1%.
To calculate the settlement amount, you first need to calculate the difference between the 3x6 FRA rate and the actual three-month Libor rate at the end of the contract.
Difference = Actual three-month Libor rate - 3x6 FRA rate
= 5% - 1%
= 4%
The settlement amount is then calculated by multiplying the difference by the notional amount and dividing by 4 to account for the difference in the day count basis between the FRA and the Libor rate.
Settlement amount = (Difference x Notional amount) / 4
Note: The notional amount is not given in the question, so you would need to provide that information to calculate the exact settlement amount.
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