can someone please explain to me how the notations for FRA’s?? i dont understand how 1 X 4 is a contract that expires in 1 month with the underlying rate of 90-day libor?
It expires one month from now, and three months after expiry (that’s four months from now), the interest is paid. For the sake of argument, assume that all months have 30 days. We have a FRA expiring one month from today, so October 14. The interest is paid four months from now, that is January 14. And then the no of days between October 14 and January 14 is 90. So your dates are like this: Sept 14 … (Sept14+30d)=October 14 … (October 14+90d)=(Sept14+120d)=January 14 Does it make sense? If not, please post any question you may have and I’ll explain again
Andreea_Mn: “It expires one month from now, and three months after expiry (that’s four months from now), the interest is paid.” You seem to confuse FRAs with Interest rate options. FRAs are settled (interest is paid) at expiry (which is the reason why interest payments are discounted in the formula).
but how would i know that a 1X4 FRA is based on the 90 day LIBOR?
4 minus 1 equals 3 months. Each month is assumed to have 30 days so the underlying is 90-day LIBOR
b_sea93 Wrote: ------------------------------------------------------- I don’t think I am confusing them, maybe my explanation was not clear enough though. I’m sorry if I confused you guys. On investopedia they explain it pretty well: http://www.investopedia.com/terms/f/fra.asp Beatthecfa’s explanation is short and to the point, thanks for helping us out all the time! You just substract and multiply by 30, a 6*12 FRA will have a (12-6)*30=180-day LIBOR.
Andreea_Mn, haven’t you implied, that payment on 1x4 FRAs would be made 4 months from now? My bad then
GOT IT!!! thank you everyone