Banking · Treasury Management
In the context of treasury management, a Forward Rate Agreement (FRA) is a derivative instrument used to hedge against interest rate volatility. If a bank enters into a 3x9 FRA as the buyer at a rate of 7.50 percent, which of the following statements most accurately describes the timing and settlement of the contract?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The contract is a spot transaction where the interest rate is fixed today for a loan that matures in exactly 3 months from the trade date.
- 2The contract starts in 9 months, lasts for 3 months, and involves the physical exchange of the principal amount at the end of the term.
- 3The contract starts in 3 months, lasts for 6 months, and the settlement occurs at the beginning of the contract period (after 3 months) based on the discounted value of the interest difference.✓
- 4The contract starts in 3 months, lasts for 9 months, and the settlement occurs at the end of the 12-month period based on the difference between the FRA rate and the 9-month Reference Rate.
Correct answer
The contract starts in 3 months, lasts for 6 months, and the settlement occurs at the beginning of the contract period (after 3 months) based on the discounted value of the interest difference.
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