Valuing FRAs Schewser method vs. official book

CFA Level II
#1

Hi all,

I am getting a different result when using the schweser method to value FRAs versus the official method and I think that this is due to the rounding off of sig digits of the %s and fractions.

If we look at the official bk 6, pg52, question 9, part b/ c:

  1. Calculate the rate the tresurer would receive on a 6 x 12 FRA

6.03%

This result is ok.

The next part of the question is :

Suposed the treasurer went long, now 45 days later rates have rise and the new LIBOR term structure is as follows

Term (days) i rate

135 5.90%

315 6.15%

Using the schweser way :

([1+(0.0615)(315/360)] / [1 + (0.0570)(135/360)] - 1 ) * (360/180) = 6.2%

(0.062 - 0.0603)(180/360) * 10’000’000 = 8’500

8’500 / [1 + (0.062)(315/360)] = 8’062.60

using the official way : 8’100 (rounded off from 8’086.48 if you follow their methodology)

On the exam will this make a difference when it comes to choosing the correct answer ?

Thank you

#2

I know there is only one answer, and i just do it by calculating the price of a new FRA at the current day (as in when they say now 45 days later). The value would be the difference between the old price and the new price discounted to today.

#3

Rounding issues add to big difference in FRA valuation.