
Forward Contracts 69
is amount would be received by the FRA buyer. us, the FRA buyer needs to borrow INR 5,000,000 –
INR 6,253 = INR 4,993,747. is amount would be borrowed at the market rate of 8.5%, and the amount
of interest to be paid would be:
4,993,747 ×
1 + 0.085 ×
92
360
= INR 5,102,222
If they had borrowed INR 5,000,000 at 8% at the AR, they would have had to pay back INR 5,102,222, as
calculated earlier. e FRA in both the cases results in the borrower paying an eective rate of the AR,
which is 8% in this example.
4.7.4 Uses of FRAs
FRAs are used by rms and nancial institutions to hedge against unexpected changes in in ...