FRA

After 30 days, Adams wants to value a \$10 million short position in a 2 X 5 FRA. The 90 day forward rate in 30 days is now 4.14%, and the original price of the FRA was 4.3%. 120-day LIBOR has changed to 3.92%. The current value of the \$10 million FRA to the short position under this scenario is closest to: A) - \$3,948 B) -\$15,794 C) \$3,948 D) \$15,794

C. rate has gone down, so the short is +. .01075-.01035 * 10mm = 4000 discount by 120 rate to get 3,948

[(0.01075 - 0.01035)*10]*0.98975603 = 3959.02412 = C?

C

dinesh, think the discount factor is 1/1.01307 = .98710

0.01075 - 0.01035 = -0.0004 x 10 mil = 4k / 1 + (0.0392x 120/360) = 3848.407476 i like C

oopps…Thanks cfasf1 !! got it right for the very wrong reason. We should be using 3.92%

i’ll take getting it right for the wrong reasons every time on 6/7!

Hear ya mate! Every penny counts on the Judgement day. Lady luck should be by our side.

Shortcut, or if you forget the formula on the exam: Rate went down, so it’s a positive amount (to the short). This eliminates A and B. Answer D is 4x the amount from Answer C (i.e. it is an annualized ‘dummy’ answer). Since it’s a 3 month FRA, that leads you to Answer C.

C, I’ll take 'em like this all day on the 7th. Oh man guys, I can’t shake the butterflies tho.

I’m gonna use the SanFranMatt for these on exam day : )

guys…i’m scared…i don’t know how you got .01075 and 0.01035…help please!

Have you tried reading the books that came in the mail with your registration?

0.0414 (90/360) 0.043 (90/360)

The original FRA was for 90 days and priced at 4.3% or (.043*90/360) = .01075 for the 90 day period. The current price on an FRA for the same period is now 4.14% or (.0414*90/360) = .01035. Then you find the difference (.01075-.01035) = .0004. But since that difference will be 120 days in the future, you need to discount it back to today. 120-day LIBOR @ 3.92% or (.0392*120/360) = .013067 PV factor is (1/(1+.013067)) = .9871 .0004*.9871 = .000395 Then multiply by \$10million. .000395*10,000,000 = 3,950 (rounding difference) Since you shorted and rates dropped, you made money.

wandering, When you put it that way, it doesn’t sound so bad! Thanks!

wanderingcfa and 3_letters: thanks Black Swan: it’s people like you that make me a lurker. thanks.

i get C too… - 3948