question 112… whats the logic here? the answer says: inssted of declining interest rates ended higer than the CFA expected… A company has just made a loan of 100million that pays 90day LIBOR plus 1.5% margin. The CFO is concerned that there may be an interest rate decline withn the next thow months. The CFO obtains following quotes from a dealer for 3month FRAs… 60day LIbor: 0.0450 90: 0.0440 180: 0.0420… so interest rates aren’t declining, are they the company takes a short position of 100mio in a 3 month FRA and 90days later, when the contract expires, 90-day LIBOR is 4.5. in the answer the discount with the 60day LIBOR and in the numeratro its LIBORt -forward contract rate which is 0.045-0.044 can anyone help?

it doesnt discount at 60days it’s 90 days… do the math the answer is A…

but it uses the rate from 60days FRA? but intrest rates are declining?

they’re using 90 days FRA … not 60… read carefully. his position = Short FRA the short on FRA hedges against rate decrease. since in this case the rate increased, he loses money.

sorry, where do you see that the rates are increasing? sorry!!! buts the answer is 100 mio ( (o.o45-o.o44) * (90/360)/ (1 + 0.045) * (90/360) so in the denominator they use 0.045 ? why and the rates are 0.045 (60days), 0,044(90days), 0,042(180days) where do you see that the rates are increasing??

pls who can help?

remember the formula for FRA notional * libor floating (at expiry) - libor fixed (forward commitment) * time to expiration /360 _______________________________________________________________________ 1+ (libor at expiry * time to expiration / 360) the expectation was that rates would decline but in fact the rate increased. that’s why he went in a short FRA position, because he thought rates would decline. At expiry, it is stated that Libor is 4.5% at expiration (read question carefully). Try to understand the formula and you’ll understand what goes where.

thank you! i finally got it!