- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 4. Forward Rate Agreements

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**CFA Practice Question**

An investor enters into a 1 X 3 forward rate agreement (FRA) at a LIBOR rate of 1.5 percent. At expiration, the 60-day LIBOR rate is 1.7 percent and the 90-day LIBOR rate is 1.6 percent. Assuming the contract covers a $1 million notional principal, what payment will the investor most likely receive?

A. $267

B. $289

C. $332

**Explanation:**$1 million [(.017-.015) * (60/360) / (1+.017 * (60/360))] = $332.39

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**User Contributed Comments**
6

User |
Comment |
---|---|

LCMilkbone |
Where can you find this in the book? |

thanhb91 |
Why did they use 0.7 percent instead of 1.7 percent and 0.5 percent in the explanation? |

jyoti |
thanhb91: they did use 1.7%. Where did you get 0.7%? |

nmech1984 |
why is the expiration 60 days? 1x3, doesn't it mean that expiration is in 1 month i.e. 30 days? please help |

Thorrrr |
You are not expected to know this calculation for the 2020 curriculum |

maxsouto |
nmech1984 the 1x3 means 3 - 1= 2 months LIBOR, so it will start on 1 month and end on 3 months (2 months = 60 days) |