- CFA Exams
- CFA Exam: Level I 2021
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 4. Forward Rate Agreements

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**CFA Practice Question**

In a forward rate agreement, the buyer agrees to ______

II. pay an interest rate to be determined at a future date.

III. receive a fixed interest rate determined now.

IV. receive an interest rate to be determined at a future date.

I. pay a fixed interest rate determined now.

II. pay an interest rate to be determined at a future date.

III. receive a fixed interest rate determined now.

IV. receive an interest rate to be determined at a future date.

Correct Answer: I and IV

The buyer agrees to pay a fixed interest payment at a future date and receive an interest payment at a rate to be determined at expiration.

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**User Contributed Comments**
7

User |
Comment |
---|---|

aggabad |
buyer= borrower seller= lender |

mordja |
buyer = borrower = long position seller = lender = short position |

poomie83 |
buyer: pay fixed, receive floating and gains/looses on spread if interest rates increase/decrease |

johntan1979 |
Pay fixed now, receive float later. |

ankurwa10 |
I think Poomie83 and johntan1979 have better explanations/observations on this one. because i know that buyer = borrower; and seller = lender, but the term borrower in my mind implies borrowing now, which causes confusion i.e. why does the buyer have to pay fixed. at least for me, better to memorise what poomie83 and johntan1979 said. |

adidasler |
you don't pay now ... you pay later ... interest is fixed but paid at the date you get the LIBOR rate at whatever it is in the future |

Patdotcom |
the answer is contradictory. The buyer pays now or at a future date? |