September 2005
Intermediate to advanced
272 pages
9h 8m
English
Content preview from Clearing and Settlement of Derivatives
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Now let us consider what settlement would take place.
The formula used to calculate settlement is:
Notional Principal Amount (Fixed Rate LIBOR)
days in FRA period/days in year divided by
(1 (LIBOR days in FRA period/days in year))
Calculation
£5 000 000 (0.0725 0.075) 91/365 over
(1 (0.075 91/365)) £3 059.23
The LIBOR rate was higher than the fixed rate so the buyer (the
manufacturer) receives the difference from the seller, in this case a
quarter of one per cent on £5 000 000.
However, there is no exchange of the £5 million. The manufac-
turer will borrow the money from a lending source and ...
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