This workout tells us that a trader buys a 03X06 91 days, actual 360 EURIBOR FRA at 3.1% on a notional of 150 million Euros. On settlement, the three month EURIBOR rate is fixed at 2.85%. What we need to do is calculate the FRA settlement amount. We are also asked whether the trader pays or receives this amount. We've got the 03X06 FRA rate of 3.1%, the EURIBOR fixing of 2.85% 91 days in the period and the notional amounts of 150 million Euros. To work out the FRA settlement amount, we need to take the EURIBOR fixing of 2.85% minus the FRA rate of 3.1% and we are minusing the FRA rate because as the trader has bought an FRA, they pay the FRA rate. We then need to multiply this by 91 days divided by 360 and multiply by the underlying notional of 150 million Euros. And that gives us a settlement amount of negative 94,791.67.

This is a negative amount, which means the trader pays this amount because as mentioned, the buyer of an FRA pays the FRA rate And receives the underlying EURIBOR. In this case, the EURIBOR fixing is lower than the FRA rate, which results in a payment from the buyer of the FRA. Now, we're not quite done here because the settlement amount I've calculated does not reflect the fact that settlement with FRAs happens at the start of the contract. So we need to discount this amount and we do that by dividing by one plus the EURIBOR rate for the relevant number of days.

So I'm just going to put brackets around my calculation and then discount this by dividing by one plus the EURIBOR rate of 2.85%, but I need to multiply that by 91 divided by 360 and that gives us the correct settlement amount of 94,113.66 Euros.