A bought long FRA with notional principal of $10 Million, expiring in 30days, based on 90 day LIBOR. FRA is based upon initial rate of 4.75%. Assume at expiration 90 day LIBOR is 5.5%, and 60day LIBOR is 5.25%, calculatoe payoff at expiration. Answer is 18,496 paid to A Explanation: $10M[(0.055 – 0.0475)(90 / 360)] / [1 + 0.055(90 / 360)] = $10M(0.001875 / 1.01375) = $18,496 What i dont understand is, why do we need to perform the division, what’s wrong if i solve it by: $10M * (5.5%-4.75%)* 90/360 ? Thanks

Because you need to take the present value of your result, since the payment doesnt come in for 90 days