maturity sport rate % 1yr 3 2yr 4.1 3yr 5.1 4yr 4.4 5yr 4.4 calculate a forward rate for 2 yr bond, 3 yrs from now. % a. 1.74 b. 3.36 c. 4.51 d.7.16 2. two parties agree to a $100,000,000 1x4 FRA on LIBOR rate of 2.5%. in one omths time LIBoR rate are % 1 month 2.5 2 months 2.6 3 months 2.7 4 months 2.8 5 months 2.9 6 months 3 what is the payment amount due to the FRA buyer? a. $74478.65 b. $49664.76 c. 50,000 d. 625,000
- B 2. C
1 = B: [(4.4 x 5) - (5.1 x 3)]/2 = 3.35 2 = I have no idea!
first question answer is B. I dont know the 2 and 3.
soxboys21 Wrote: ------------------------------------------------------- > 1 = B: [(4.4 x 5) - (5.1 x 3)]/2 = 3.35 > 2 = I have no idea! What kind of formula is this that you are using to answer 1??? I have never seen this before. the reason I said its b is because I saw an declining spot rate curve.
1=b (1.044)^5=1.051^3+X^2 2=b 2.7%-2.5%=.2% .002*100.000.000=50k 50 k has to be discounted because the payment wouldn’t be right away but it would at the end of the contract so 50000/(1.0+.027/4)=49664 FRA 1X4 =in one month a three month contract
hey gameday…how did u get to that…in the 1st part… I tried calculating it that way and it gives me 0.28 not b? I am confused totally in spot rates. Can you give the formulas for converting spot to forward and reverse…in differing scenarios. i am too confused.
pepp Wrote: ------------------------------------------------------- > soxboys21 Wrote: > -------------------------------------------------- > ----- > > 1 = B: [(4.4 x 5) - (5.1 x 3)]/2 = 3.35 > > 2 = I have no idea! > > > What kind of formula is this that you are using to > answer 1??? > > I have never seen this before. > the reason I said its b is because I saw an > declining spot rate curve. This was referenced in the Schweser material (as a, sort of, short-cut)… If you have Schweser stuff, Book 5, page 124 (Professor Note), briefly mentions this…
Yeah that’s the shortcut formula. BTW it really helps to draw a timeline for these type of Qs…it only takes like 10 secs. For Q2…you just have to know that 1X4 means the contract expires in 30 days and will be based on 90 day LIBOR. (You get that from doing (4-1)*30 = 90) A 2x4 would mean you will use the 60 day LIBOR…60 days from now. Its explained well in Schweser.
Having trouble with the first question… I got this solution from shweser also Take 5 years of 4.4% - 3 years of 5.1% ------------------------------------------------------- > soxboys21 Wrote: > -------------------------------------------------- > ----- > > 1 = B: [(4.4 x 5) - (5.1 x 3)]/2 = 3.35 But shouldn’t this equal 1.044^5/ 1.051^3 = 6.83% 6.83/2=3.42% Confused
- C 2. B
My question when it comes to FRA rates is given a question like 2 when do or dont u discount cause in the question they where not very particular in saying when they want the payment calculated now or at maturity
I believe you would always discount…thats a basic characteristic of how these arrangements work and the contract has to be settled on the day it expires.
Can someone help me with my question on #1 Re: sport rates & FRA Posted by: SConnery (IP Logged) [hide posts from this user] Date: May 22, 2008 03:48AM Having trouble with the first question… I got this solution from shweser also Take 5 years of 4.4% - 3 years of 5.1% ------------------------------------------------------- > soxboys21 Wrote: > -------------------------------------------------- > ----- > > 1 = B: [(4.4 x 5) - (5.1 x 3)]/2 = 3.35 But shouldn’t this equal 1.044^5/ 1.051^3 = 6.83% 6.83/2=3.42% Confused
What is a sport rate 
the answers are b b
gameday0 Wrote: ------------------------------------------------------- > 1=b > > (1.044)^5=1.051^3+X^2 > > 2=b > 2.7%-2.5%=.2% > .002*100.000.000=50k******* > 50 k has to be discounted because the payment > wouldn’t be right away but it would at the end of > the contract so > 50000/(1.0+.027/4)=49664 > > FRA 1X4 =in one month a three month contract .002*100.000.000=200,000 BUT YOU ONLY PAY THIS DIFFERENCE FOR 3 months so divide 200.000 by 4 and you get 50k. sorry bout that.
SConnery Wrote: ------------------------------------------------------- > Can someone help me with my question on #1 > > > > Re: sport rates & FRA > Posted by: SConnery (IP Logged) > Date: May 22, 2008 03:48AM > > Having trouble with the first question… > > I got this solution from shweser also > > Take 5 years of 4.4% - 3 years of 5.1% > -------------------------------------------------- > ----- > > soxboys21 Wrote: > > > -------------------------------------------------- > > > ----- > > > 1 = B: [(4.4 x 5) - (5.1 x 3)]/2 = 3.35 > > > But shouldn’t this equal > > 1.044^5/ 1.051^3 = 6.83% > 6.83/2=3.42% > > Confused (1.044)^5 = (1.051)^3 x (2F3)^2 Solve for 2F3 and you get 3.3585%
got B since I got 3.42% and B was the closest to that. FRAs I am weak on so will not even attempt it