Sorry this question is too long to write out, but basically we have an FRA and we are asked to find the FRA value 3 months into the deal. According to the CFAI texts, we are supposed to use the formula given on page 27 (CFAI Volume 6) by 1/(1+L(h-g) - (1+FRA)/(1+L(h+m-g)) but in the solution they do it totally differently, they recalculate the FRA rate, find the diff between it and the original rate and discount it…why the huge difference between the methods? Thanks in advance.
the formula in the text is exactly the same, but with queer notation, and makes you remember 1 more formula, which is not required. Schweser’s method is easier, more intuitive.
Thanks for the reply, how is it exactly the same? In the schweser one we calculate a new rate and we seem to get different answers with the methods…
ShintreH, I took that exam the other day and had the same exact question you had. I think Schweser is wrong here, although to be honest with you, I would calculate it the CFA way, then calculate it the Schweser way and see if both answers are there. If they are, well, that sucketh mightily. Ultimately, I would just think about it. Calculate the difference in rate on the FRA and the current rate, scale it by the number of days in the loan period, and discount it back to present day. If the CFA formula gives me this, I go with that. If Schweser’s does, then I go with that. Yes, it takes more time. I know I know.