Jscott24 - FRAs

CFA Level II
#21

jscott - nice work man. quick question, when you’re valuing the FRA 10 days after initiation, i understand how to calc the new FRA price and that the value should be the discounted interest rate differential times the notional amount. but, you say “Remember we locked in at 5.38%” - shouldn’t this be 5.32%, which is the FRA price you calc in the first post?

#22

JScott24 moved to L3 last year, so you won’t have any reply from him.

#23

ridge you are correct. this is a typo on his end. if you substitute 5.32, the answer is the same ($1,487.39)

#24

got it thanks - just wanted to make sure i knew where the numbers were coming from.

#25

Stolen from one of cp’s old posts: JScott 24 FRAs http://www.analystforum.com/phorums/read.php?12,754042,764130#msg-764130 Swaps: http://www.analystforum.com/phorums/read.php?12,749056,750229#msg-750229

#26

Really nice.

#27

Can you imagine my relief at finding this post from Jscott24 after having tried to understand the CFAI section on FRAs?

#28

Great …For those who are studying derv right now

#29

Went looking for this thread for my derivatives review so I figured I’d bump it for other people’s benefit…

#30

Any other summary threads like this I’m missing out on?

#31

bump

#32

You’ll need it. Bump

#33

Bump

#34

I am more inclined to using the formulas. The challenge in FRA is identifying the various LIBOR rates and the algorithmic approach described here does not facilitate that. Instead I use a timeline to identify the inputs for the formula. A more efficient and faster way in my opinion.

#35

nice work

Can you explain the 2nd formula a bit more,

thanks

#36

In formula 1 we are essentially dividing the long bar by the short bar to find a forward rate. Recall a 1 year forward rate is simply the 2 year spot divided by the 1 year spot.

In formula 2 we are essentially discounting things, as you can see the bars are in the denominator. It may not be very intuitive but the derivations are in the curriculum.

Our task is to identify h,m h-g and h+m-g and label the timeline.

In a 1×4 FRA for example h=30, m=90, h+m=120

After 10 days g=10, h-g=20, h+m-g=110

The LIBOR rates will be given. All we need is apply the the formula and remember to always un-annualize them using their number of days.