Schweser Notes Book 4, Page 97
So is this calculation in Schweser the correct methodology? And also, where exactly is this example in Vol. 5? Thanks
sparty419 Wrote: ------------------------------------------------------- > So is this calculation in Schweser the correct > methodology? And also, where exactly is this > example in Vol. 5? > > Thanks I don’t think calculation in Schweser is the correct methodology. No similar example in V5 of L3, you must refer to L2.
If its from level 2, can we expect a question like this? Or is this purely for knowledge purposes?
Both 2008 & 2009 AM Exam have this kind of question.
Thanks AMC. Will refer to them.
ok, here is Schweser’s reply: In level 2, we only computed the value of the FRA payoff at contract expiration. This requires discounting the payment from the end of the loan back to the end of the FRA. We do this by discounting at the LIBOR rate at settlement. In our example, you see that we divide by (1+6%). Since we are trying to determine current credit risk for the FRA contract and there are three months remaining in the contract, we discount the expected payoff back at the risk-free rate for three months. This is an additional step to what was performed at level 2. For a review of computing the payoff for an FRA at settlement please refer to pg 91 of the Level 1 and 2 Refresher Book.
happyking02, I checked L2 curriculum again, my findings, Most correct : (1M x 1%)/(1+Libor Rate of 15 months) Since it is first discounted by (1+6%), 6% is one years Libor Rate, and there are three months remaining in the contract, to determine current credit risk : [(1M x 1%)/(1+Libor Rate of 15 months)] / (1+Libor Rate of 3 months) I see no reason to discount at risk free rate as : [(1M x 1%)/(1+Libor Rate of 15 months)] / (1+risk free rate of 3 months) Any other comment ?
So whats the answer then: [(1M x 1%]/(1+.06)]/(1+.06)^.25) ? Is the above correct then? I get 9,572. Pls. confirm.
did someone figured it out ,
I am sorry and the correct calculation shall be as follows. [(1M x 1%)/(1+Libor Rate of 15 months)] or [(1M x 1%)/(1+6%)]/ (1+Libor Rate of 3 months)
Guys I think we should consider this stuff logically. If a lender enters into an agreement to loan some funds to a counter party in x days, I guess it is implicit that the lender will place the funds initially in a risk free account prior to undertaking the counterparty risk… Thus I get schweser’s point of discounting by the risk free rate for the period prior to when the transaction commences.