- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 31. Pricing and Valuation of Forward Commitments
- Subject 4. Interest Rate Forward and Futures Contracts
CFA Practice Question
Kevin, a corporate treasurer, wants to hedge against an increase in future borrowing costs. He plans to enter into a long 3 x 9 FRA. The current term structure for LIBOR is 30 day - 4.89%; 90 day - 5.10%; 180 day - 5.27%; 270 day - 5.52%; 360 day - 5.65%. What is the rate Kevin would receive on a 3 x 9 FRA?
Correct Answer: Here the notation would be: h = 90, m = 180, and h + m = 270.
L0(h) = L0(90) = 5.10%, and L0(h + m) = L0(270) = 5.52%
FRA(0, h, m) = FRA(0, 90, 180) = [(1 + 0.0552 x 270/360)/(1 + 0.051 x 90/360) - 1] x (360/180) = 5.6579%
L0(h) = L0(90) = 5.10%, and L0(h + m) = L0(270) = 5.52%
FRA(0, h, m) = FRA(0, 90, 180) = [(1 + 0.0552 x 270/360)/(1 + 0.051 x 90/360) - 1] x (360/180) = 5.6579%
User Contributed Comments 3
User | Comment |
---|---|
danlan2 | 3x9 FRA means 90 days to 270 days. |
dblueroom | means based on 180-day LIBOR 90 days from now. |
quanttrader | here 3 x 9 means fra to be recvd 3 months from now based on 9-3 = 6 month rate. F(0,h,m) = [[(1+L(h+m))x(h+m/360)] / [(1+L(h))x(h/360)]]x 360/m |