The value of the FRA at maturity is paid in cash. If interest rates increase then the party with the long position will receive a payment from the party with a short position. If interest rates decline the reverse will be true. The annualized 180-day loan rate is 4.96%. Given that annualized interest rates for a 180-day loan 90 days later are expected to drop to 4.2%, a cash payment will be made from the party with the long position to the party with the short position. The payment is given by:
The present value of the FRA at settlement is:
38,000 / {1 + [0.042 × (180 / 360)]} = 38,000 / 1.021 = $37,218
