*Ignore - optional section

CFA Level III
#1

Hey guys,

Not sure if it has already been mentioned elsewhere on the Analyst Forum, but I thought I’d share my simplified formulas:

Initial funds needed to invest = NP - FRA payoff = NP x (1+FRA rate * T/360) / (1 + LIBOR * T/360)

  • NP is notional principal

  • LIBOR - rate on the underlying instrument for an FRA contract

Effective return:

Return = FRA rate + spread * (1 + FRA rate * T/360) / (1 + LIBOR * T/360)

  • spread is a spread over LIBOR

So from the above Return formula, an investor will pay a rate very close to the FRA rate, as the second term in that formula is very very small.

#2

why are we talking FRAs (forward rate agreements) when they are not a part of the curriculum?

Is it because Schweser has a primed up section on it?

#3

You are right… It is an optional section in the CFAI books. =) so no need to use these formulas =)