Boeing expects to receive 50 million in 60 days. Boeing expects short term rates to rise during the next 2 months. Boeing decides to use a FRA that expires in 60 days and is based on the 60-day LIBOR. It’s quoted at 4.75% and at expiration LIBOR is 5%. Based on a notional principal of 50 million, which of the following is least accurate? A This is a 2 X 4 contract. B Boeing should go long the Forward Rate Agreement. C The long position had a gain of approximately 20661.15 D The long position had a gain of approximately 20669.69

D

I’d go with B: 50[(.05-.0475)(60/360)]/(1.05)(60/360) = $119047.62 Since the rate went up, the long had a gain of $119,047.62

soxboys21 Wrote: ------------------------------------------------------- > I’d go with B: > > 50[(.05-.0475)(60/360)]/(1.05)(60/360) = > $119047.62 > > Since the rate went up, the long had a gain of > $119,047.62 Sorry, missed the least accurate… In that case, I have no idea…

Think it’s D too… remember on the bottom line, you need to multiply (0.05)(60/360) the add 1

Dang, so the 1 + is OUTSIDE of (…). I was putting it inside…

Maybe I missed this in the reading, but in regards to FRA, what is a 2 x 4 contract?

Yep. I remember this now, after I have made the exact same mistake about a million times before!

I think something is wrong with this question, the #s on C and D dont make sense to me…

This is the full answer… 50,000,000 x [(0.05-0.0475)(60/360)] / 1+[(0.05)(60/360)] = 20,661. Therefore, the long has gained 20,661. Therefore, D is not accurate.

I am just gonna do what I plan to do on the exam and guess…I guess A. Answer, explanation?

Alright at 6 decimal points I am in the ballpark, so I get the bottom two numbers…but both are very close. I also missed the 2x4 contract, what is that?

I just looked up the 2x4 since I didn’t know what it was. 2 refers to the number of months until contract expiration and the 4 refers to the total time until the end of the interest rate period…

So would this be considered a 2x2? 60 day contract on a 60day LIBOR? Wouldnt the “4” be a 120 day interest rate period then?

I think it’s adding both 60-day periods together. If you use Schweser, check out page 178 (at the top) in Book 5…

D Boing should go long the FRA and the payoff is: 50 million * (.0025 * (60/360)) / (1 + (.05 * (60/360))) Payoff 20661.15702 I have no idea how to do this problem likewise.

2X4 is correct. This means 60 days contract with (4-2) *30 = 60 days LIBIOR rate. Similarly 2X6 means 60 days contract with (6-2) * 30 = 120 days LIBOR.

The books usually use 90 day LIBOR so maybe that is why 2x4 looked wrong.