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Basic Question 5 of 6
An investor goes long on an FRA that expires in 30 days, for which the underlying is 90-day LIBOR for a notional of $10 million. A dealer quotes this instrument at 4.5 percent. At expiration, 60-day LIBOR is 3.5 percent and 90-day LIBOR is 4 percent. The payment made at expiration is closest to ______.
B. $12,376 from the dealer to the investor
C. $16,570 from the investor to the dealer
A. $12,376 from the investor to the dealer
B. $12,376 from the dealer to the investor
C. $16,570 from the investor to the dealer
User Contributed Comments 5
| User | Comment |
|---|---|
| farhan92 | i cant seem to get the right answer plugging the numbers in :/ |
| farhan92 | ahh you do 0.04(90/360) +1 not 1.04(90/360) |
| alex2001 | same error here... |
| Logaritmus | long a FRA => pay fixed receive floating => at the end of 90 days term of LIBOR borrower will have following CFs: Paid fixed: <4.5%*(90/360)>*NA Receive float: <4%*(90/360)>*NA That sums to <0.125%*NA> = <12 500$> at the end of 90 days. We should discount it back till the end of contract so borrower will paid 12500$ discounted back by 90 days (it should be less than 12500$ so choose A without computing). |
| ashish100 | Underlying is the interest determined at expiration if that helps anyone. That threw me off and got answer C instead. |
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Andrea Schildbach
Learning Outcome Statements
explain how forward rates are determined for interest rate forward contracts and describe the uses of these forward rates
CFA® 2024 Level I Curriculum, Volume 5, Module 5.