easy one - FRA?

what does FRA stand for? i can’t seem to find it in the curriculum index. i think it’s forward… or is it floating?? anyway, can find either or just FRA in the index? thanks in advance!!

Forward Rate Agreement. That will be 1 cupcake please.

thanks… weird i don’t see it in index.

Dude - FRAs were all over level II, don’t you remember? Might want to bone up - they’re kind of hard.

Smarshy Wrote: ------------------------------------------------------- > Dude - FRAs were all over level II, don’t you > remember? Might want to bone up - they’re kind of > hard. i’ve looked at them lots, looked at tying them into loans. but i’m looking for one specific passage, basically.

I was about to say there’s no such thing as an easy question about FRAs, but you managed to find one.

^LOL Fortunately for me, we use FRA’s a bit so I think I have a pretty good grasp on that. But I’m sure CFAI can put me in my place.

knowing our luck, FRA will be on this exam. not really hard at L3, so bring it! 1. calculate pay off 2. PV payoff to FRA loan date at borrowing rate 3. PV #2 at risk free rate to today

yeah, i found it guys… had done this a few times, but not too recently. not that i particularly care at this point but it seems a little strange that they discount the year back at libor, and then the extra three months back at Rf??? and this is really opening a can of worms, but can the FRA rate be much higher in a year? i.e. libor today is 5%, libor in a year is 7%. you do FRA at 7%, initial value = 0. then one second later, the FRA has value to one party because it’s in the money by 200 bps… i think it’s just a gross simplification and that’s where i’ll leave it. or am i wrong that FRA starts at value of zero. i think it does. still surprised i couldn’t find FRA in the index.

how’s the PV payoff to loan date again? Based on LIBOR at the payoff date when the rate is set? and is it something like [0.04 * (90/360)* NP] / 1+(0.04*(90/360)? i.e. I know to PV to today to determine value you need to use the rfr raised to the t power.

yeah. just don’t forget if they are borrowing at LIBOR + spread, use spread.

they discount back at libor + spread??. yeah, that sounds right. why don’t they discount the first three months by libor? why risk-free?