c. compare and contrast interest rate options to forward rate agreements (FRAs) ya, as in what Joey mentioned I read it like 5 times, unless it’s hidden in another section…you can try to find it, see if you have any luck I search both under FRA and interest rate options btw… I mean, just think about it, one discounts it, the other doesn’t, isn’t that the compare and contrast they want you to understand?
- FRA’s are forward contracts so someone is going to pay someone some money. Options do not need to be exercised. 2) Interest rate options (at least options on interest rate futures) are exchange traded with no counterparty risk. FRA’s are negotiated with a counterparty. 3) FRA’s have convexity as explained above. Puts and calls have “rho” sensitivity. 4) Puts and calls have prices that depend on interest rate volatility. FRA’s values don’t directly depend on vol.
Of course you’re right JDV, and the books are wrong. But if a question like that comes up in the exam, I’m going to put A) and move on to the next one.
That’s what I would do too. Gotta pass the exam. The quality of questions actually on the CFA exam is pretty high since a bunch of people have checked them.
good to know.
well, the books are not wrong, at least CFAI’s on this topic, just schweser threw in that extra bit… I mean, did anyone see any questions like this from any of the sample exams? I didn’t…