FRA Question

fr schweser: A company treasurer needs to borrow 10 millions euros for 180 days, 60 days fr now. The type of FRA and the position he should take to hedge the interest rate risk of this transaction are: FRA Position A 2X6 Long B 2X6 Short C 2X8 Long D 2X8 Short ---- What does 2X8 2X6 FRA mean?

C. 2X8 Long where 60=2x30 and 180 = 8-2=6x30

I also got C.

first number = start second number = end e.g.

He is going to have the euro in 2 months. and he wants to sell it in 8 months. So he can be the long.

borrow = buy = LONG 60 days fr now = 60/30 = 2 180 days duration = 180/30 = 6 So ans is LONG (2, 2+6) = 2X8 LONG = C - Dinesh S

thanks guys

Is there an easy way to remember this? Alby- I think I like your approach. He’ll have euro in 2 months and wants to sell it in 8 months. Any other approaches or thoughts? rjs157

Set up a timeline. You are at time zero now. You need the euros in 2 months (60 days) you will give them back in 8 months (180 days or 6 months after you get them). So the 2x8 is looking from time zero in both cases.

thanks mwvt9, very helpful

come on guys…i want to see harder stuff than this…

alright here you are longoncfa - a company want to hedge. the following quotes are obtained from a dealer. 60day - libor - 0.0480 90day - libor - 0.0500 120day - libor - 0.0525 the contract covers a notional payment of 50m. the company hedges its risk of an increase in 60d libor with an fra and 30d later when the contract expires the 60d libor rate is 5%. what does the company collect from or pay to the dealer? the company: a) collects 16529 b) collect 29691 c) pays 29691 d) neither collects or pays

and with regards to this thread- what type of fra would this be?

bought fra rate rose so Collect. Interest amount: 50M ( .05 - 0.0480) * 60/360 = 16667 Convert at Future rate: 16667 / (1 + .05 * 60/360) = 16529 Choice A

1 x 3 long.

LongOnCFA Wrote: ------------------------------------------------------- > come on guys…i want to see harder stuff than > this… Be careful what you wish for… :slight_smile:

(0.05 - 0.048) * 50M = Interest = 0.1M convert it to 60 days yield annualized on 360 days year = 0.1M * 60/360 = 0.0166667M The company collects 16666.7 on this 1X3 LONG FRA? [but why can’t I see such an option??] - Dinesh S

dinesh you forgot the conversion at the future rate… hence you do not see the option

To expand more on high park’s answer, the first number is the number of months from now until the forward expires and the second number is the maturity of the rate. For example, 2x8 means that in two months, you’ll be locked into a 6 month rate. It’s a 6 month rate because in 2 months, there will only be 6 months left (8-2). Long means you’re guaranteeing yourself that rate and short means you’re offering a guaranteed rate to someone else. In the question, the guy wants to have a guaranteed rate in 2 months, so he buys (long) a FRA. We know that the first part is 2 because he’ll need the rate in two months. The second part is 8 because in 8 months from now, the 180 days will have matured, assuming they started 2 months from now at the FRA expiration (2+6=8). The answer is C Long 2x8.

better way to put it I think is PV of the future payment, because the payment is settled at contract expiration, not 60 days in the future.