Forward Rate Agreement MCQs: Test Your Knowledge

Forward Rate Agreement (FRA) is a popular financial contract used by businesses and investors to hedge interest rate risk. It is a contract between two parties to exchange a fixed interest rate for a floating interest rate in the future at a specified date. If you are planning to enter into an FRA contract or looking to test your knowledge about FRAs, here are some multiple-choice questions to help you out.

1. What is a Forward Rate Agreement (FRA)?

A) A contract where the buyer agrees to pay a fixed rate of interest, and the seller agrees to pay a floating rate of interest in the future.

B) A contract where the buyer agrees to pay a floating rate of interest, and the seller agrees to pay a fixed rate of interest in the future.

C) A contract where both parties agree to pay a fixed rate of interest in the future.

D) A contract where both parties agree to pay a floating rate of interest in the future.

Answer: B) A contract where the buyer agrees to pay a floating rate of interest, and the seller agrees to pay a fixed rate of interest in the future.

2. What is the purpose of an FRA?

A) To speculate on interest rate movements.

B) To insure against interest rate risk.

C) To earn a higher rate of return than the market average.

D) To invest in the stock market.

Answer: B) To insure against interest rate risk.

3. In an FRA contract, what is the settlement date?

A) The date on which the contract is signed.

B) The date on which the fixed rate is determined.

C) The date on which the floating rate is determined.

D) The date on which the interest rate payments are exchanged.

Answer: D) The date on which the interest rate payments are exchanged.

4. How is the settlement amount calculated in an FRA contract?

A) By subtracting the fixed rate from the floating rate.

B) By subtracting the floating rate from the fixed rate.

C) By multiplying the notional amount by the fixed rate.

D) By multiplying the notional amount by the difference between the fixed rate and the floating rate.

Answer: D) By multiplying the notional amount by the difference between the fixed rate and the floating rate.

5. What is the notional amount in an FRA contract?

A) The amount of interest paid on the floating rate.

B) The amount of interest paid on the fixed rate.

C) The amount on which the interest rate payments are based.

D) The amount invested in the stock market.

Answer: C) The amount on which the interest rate payments are based.

Conclusion

Forward Rate Agreement (FRA) is a useful financial contract for businesses and investors to hedge against interest rate risk. By answering the above multiple-choice questions, you can test your knowledge about FRAs and better understand how they work. Keep learning and growing your skills in the field of finance and investments.