How important is it to memorize the formula to calculate FRA prices? Its killing me. - LRM
Not sure what study program you are using, but Stalla has a nice way of breaking it down to a much easier formula to memorize.
do not have to memorize it. just understand it. All problems in fixed income/derivatives are just discounting and compounding. what you need to do is idetify are : which point of time do you have to discount to which discount rate you should use which value(future? present?) you should use the rest is just multiple a (1+x)^t, or divide by it.
lrm1234 Wrote: ------------------------------------------------------- > How important is it to memorize the formula to > calculate FRA prices? Its killing me. > > - LRM Very important! It’s 90% probabilty that we will have to use it on exam! I read Schweser - they have a longer way of explaining this procedure, but much more clear. Formula in CBOK is much shorter - but it’s idea hard to grasp, I agree. However, if you solve several problems with close attention - you can get the feeling of how to use it, after that memorizing formula will be much easier. That helped me, at least. Personaly I memorize the idea of that formula this way: we substract from short tem discont present value of FRA @ long term discont. FRA fromula itself is not that hard and quite intuitevly clear. HTH
I ignore the value formula and base everything on the price formula, which is easy: take the long rate divide it by the short rate, then minus one, then annualize it. Done. The value of the FRA is basically a difference between two prices, calculated as above.
I thought that the EOC in CFAI book 6 about FRA really helped my understanding of the subject. The Schweser way of explaining it was very frustrating to me. It seemed like too many needless steps. We have enough equations to memorize on this exam, so I prefer the shortest way possible to get to an answer.