Joe Robertson sold an FRA expiring in 60 days with a $10m notional amount. The underlying is 180-day LIBOR. The rate of the FRA at the start of the agreement is 6%. At expiration 60-days later, the rate on the 180-day LIBOR is 5%. Which of the following best describes this contract and what is Joes payoff at expiration? A. 2X6 FRA and Joe receives $50k at expiration B. 60X180 FRA and Joe receives $49,719 C. 2X8 FRA and Joe pays $41,763 at expiration D. 2X8 FRA and Joe pays $48,780… Can you please explain how they got to 2X8? If the underlying amount is 180, using the timeline what should the initial t equal? I mean, I understand that 180+60=240 which would make it a 2X8 but that isn’t where my mind went initially. There has to be an easier way to figure out how to describe the contract. I do know the calculations from there, but obviously cannot get the question correct if I use the wrong numbers! Thanks!
Okay, I think it is because I am mixing up my terms–when they state the underlying rate, is that the difference you should get between the 2X8–(240-60)…so on the timeline, it goes t=0, then t=60 ending with t=240?
In FRA 2X8 would mean the following: 2 is the time until FRA expires 8 is equal to total time. (Time until settlement + LIBOR time) 180/30= 6 + 2= 8