i) Purpose of FRA Arrangement:

• A Forward Rate Agreement (FRA) is a financial contract that allows a company to hedge against interest rate fluctuations by locking in an agreed rate for a future borrowing period.
• The primary objective is to protect against adverse movements in interest rates, ensuring cost predictability for short-term financing needs.
• By entering into an FRA, BOGML can mitigate the risk of rising borrowing costs, which is crucial for financial planning and cash flow management.

ii) Settlement Amount Calculation:

Given:

• Notional Principal Amount: GH¢15 million

• Quoted FRA Rate: 32.40% – 32.16%

• FRA Reference Rate (Benchmark): Six-Month Ghana Reference Rate (GRR)

• Time Period: Six months (0.5 years)

• Settlement Formula:

  Settlement Amount=(Actual GRR−Agreed FRA Rate)×Notional Principal×Loan Period1+(Actual GRR×Loan Period)\text{Settlement Amount} = \frac{(\text{Actual GRR} – \text{Agreed FRA Rate}) \times \text{Notional Principal} \times \text{Loan Period}}{1 + (\text{Actual GRR} \times \text{Loan Period})}Settlement Amount=1+(Actual GRR×Loan Period)(Actual GRR−Agreed FRA Rate)×Notional Principal×Loan Period​

Case 1: If GRR = 37.50%

• FRA Buyer (BOGML) benefits because the actual rate is higher than the agreed FRA rate.
• Settlement Amount Paid by FRA Seller to BOGML.

Case 2: If GRR = 28.50%

• FRA Seller benefits because the actual rate is lower than the agreed FRA rate.
• Settlement Amount Paid by BOGML to FRA Seller.