Hi guys Qn 10 - In the answer they discount the 25,000 by 3% for a year and then 2.8% by 5 months. I can understand the second part but why should the discount rate be 3%?? The answer says 3% is the market rate. Shouldn’t the 25,000 be discounted under the rate AS SPECIFIED in the agreement, i.e. 5%? I always thought that to value cash flows at the end of the FRA, you discount them back at the rate specified in the agreement? Here Schweser says you discount at the market LIBOR rate. Qn 12 - I actually did this question in dollars and not euros, and got the same answer as them but in dollars. If I convert this to euros at the spot I get their answer. How do we know which currency to write the answer in on the exam? Does it matter? Or should we just use whatever currency the manager is receiving? Here the German manager delivers dollars and receives Euros, so the answer should be in Euros. Thanks!
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the below is the errata on Q 10 For question 10 the payoff of the FRA of $25,000 should be discounted by 4.5% in the second equation instead of 3% resulting in $25,000/1.045 = $23,923 and the 3rd equation then becomes $23,923/(1.028)5/12 = $23,649. ( Posted: 2009-04-02)