Got this question:
FRA 2x5 forward price is 4.3%, we enter at this price
after 30d, the 90d forward rate in 30d is 4.14%
120d libor is 3.92%
notional 10m
what is the value?
for me, i used this formular given from curriculum:
H:60,m:90,g:30
So v = 1/(1+0.0414x 30/369) - (1+0.043 x90/360)/ (1+ 0.0392 x120/360)
times 10 m to get the value to the long. Yes? I got around 11k
The answer gave a diff approach, which i think makes perfect sense but dont know why its not the same with my approach:
FRA payoff in 120d: (0.0414-0.043)x90/360x 10m =- 4,000
pv of 4,000 = -4,000/(1+0.0392x120/360) =-3,948
why is this 2 approach differs?
I don’t understand this one: you’re discounting 1 at the 90-day forward rate (in 30 days), but you’re discounting it for 30 days.
Are you sure that you copied this correctly. Frankly, it doesn’t make sense.
The second method makes sense: you’re taking the payoff in 120 days and discounting it for 120 days, at the 120-day spot rate.
Dont use the formula. Learn to work through FRAs intuitively.
Don’t learn to work through FRAs (or anything else, for that matter) intuitively; understand them.
Ok thanks i got it. The question tricked me by not giving me the 30d rate, but giving the 90d forward rate in 30d instead. Damn!
Good to hear!
They’ll do that to you. They’re seeing if you really know this stuff.
As you say.