Forward Rate Agreement Mcq

Forward rate agreement (FRA) is an over-the-counter financial derivative that is used to manage interest rate risk. It is a contract between two parties where one party agrees to pay a fixed interest rate to the other party on a specified notional amount of money for a certain period of time in the future. In exchange, the other party agrees to pay a floating interest rate based on a benchmark rate such as LIBOR.

If you are looking to test your knowledge on forward rate agreement, here are some multiple-choice questions (MCQs) that can help you gauge your understanding of the concept:

1. What is a forward rate agreement?

a) A contract between two parties to buy or sell an asset at a future date

b) A contract between two parties to exchange interest payments in the future

c) A contract between a bank and a customer to lend or borrow money at a fixed interest rate

d) A contract between two parties to hedge against foreign exchange risk

Answer: b) A contract between two parties to exchange interest payment in the future.

2. What is the notional amount in a forward rate agreement?

a) The amount of interest paid by the fixed-rate payer

b) The amount of interest paid by the floating-rate payer

c) The amount of money that the contract is based on

d) The amount of money that is exchanged at the settlement date

Answer: c) The amount of money that the contract is based on.

3. How is the settlement date determined in a forward rate agreement?

a) The date when the contract is signed

b) The date when the notional amount is exchanged

c) The date when the fixed-rate payment is due

d) The date when the floating-rate payment is due

Answer: b) The date when the notional amount is exchanged.

4. What is the difference between a forward rate agreement and a futures contract?

a) A futures contract is traded on an exchange, while a forward rate agreement is an over-the-counter contract

b) A futures contract has a standardized notional amount and settlement date, while a forward rate agreement has a customized notional amount and settlement date

c) A futures contract is settled daily, while a forward rate agreement is settled at maturity

d) A futures contract involves the physical delivery of the underlying asset, while a forward rate agreement only involves the exchange of cash flows

Answer: b) A futures contract has a standardized notional amount and settlement date, while a forward rate agreement has a customized notional amount and settlement date.

5. How is the fixed interest rate determined in a forward rate agreement?

a) Based on the current market interest rates for the relevant maturity

b) Based on the historical interest rates for the relevant maturity

c) Based on the creditworthiness of the counterparties

d) Based on the notional amount of the contract

Answer: a) Based on the current market interest rates for the relevant maturity.

In conclusion, forward rate agreements are an important tool for managing interest rate risk. By taking this quiz, you can assess your knowledge of forward rate agreements and ensure that you have a good understanding of the concept.