Reading 48 - Derivatives - FRA CFAI Formula

CFA Level II
#1

Guys,

I’ve been reading the curriculum from various sources and currently I am studying the Derivatives section.

However, I have become completely confused with the formula that CFAI uses to compute the value of an FRA on day g (please check page 35).

While doing this by myself, I was computing the new implied FRA rate, and subtracting the difference from the old one, in order to compute what is essentially the FV of the difference in interest at maturity. Then, I was discounting everything with the current rate for (m+h-g) (for the period from now until the maturity of the loan). This is consistent with Elan’s and Schweser’s formulas and seems to produce the same results with the CFAI formula.

However, in the EOC the CFAI formula is used, and I was wondering if anybody here has grasped the logic behind this formula and why it is essentially the same with the Schweser and Elan’s one…

Thanks

#2

you will find elan’s and schweser’s method also works for the CFAI EOC questions - but if memory serves me right - there are a lot of rounding errors in the Level II curriculum EOC questions for the FRA chapter.

#3

Thank you cpk123.

I know it works, this is what I’ve been using (and it also makes sense!!).

However, I am really confused about the CFAI one, I cannot understand the logic behind it (and couldn’t make them equal algebraicly… )