Hi guys, Reading 60, question 10C simple calculation that is driving me nuts! I got the FRA payoff right and I am plugging in all the info for the mkt value of the FRA but I keep getting a different answer than the book. Here’s what I got: [1 / ( 1 + (0.55 X (60/360))] - [1 + (0.0619 x (90/360)) / (1 + (0.0562 x (150/360))] I keep getting - 0.07621 whereas the book says -0.001323. For an NP of $15m, it makes a hell of a difference. Any ideas where I’m going wrong?!
In general, for all value versus price calculations, I don’t use the value formula. I just use the price formula (which is much simpler) and work out the math. Using currency forwards, I wrote this about this method…“I have enough formulas to remember. What I do is calculate the *price* of the new contract after 30 days passed. Then the *value* of the contract is simply the difference between the original price (at initiation) minus the new price (the one you calculated after 30 days passed). That amount needs to be discounted to today (day 30) using the rate of the subject currency.”
you have the wrong rate in your first calculation. It is 0.055 not 0.55
Sorry guys, i was just plugging it in wrong, what do you mean dreary? What other formula? I’m confused! I don’t really get what you’re doing there… :S
The book has formulas for finding the value of forwards and futures on all kinds of instruments, plus the formulas for price. If you’re happy with those formulas, then you’re fine…ignore me.
I agree with Dreary…I do it the same way. Much easier…just remember that on things like FRA’s you have to discount the final value back