- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 4. Interest Rate Forward and Futures Contracts

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**CFA Practice Question**

To hedge against a possible decrease in short-term interest rates, a financial manager of a company went short on a 1 x 2 FRA 30 days ago. The rate she received based on the LIBOR term structure of that time was 6.32%. Today is the contract expiration day. The 30-day LIBOR is 6.10% and the 60-day LIBOR is 6.52%. For a notional principal of $5 million, what is her payoff on the FRA?

A. The company should pay $828.83.

B. The company should pay $912.03.

C. The company should receive $912.03.

**Explanation:**Here the notation would be: g = 30, h - g = 0, h + m - g = 30.

L

_{g}(h - g) = L

_{30}(0) = 0%, L

_{g}(h + m - g) = L

_{30}(30) = 6.10%

V

_{g}(0, h, m) = V

_{30}(0, 30, 30) = 1/(1 + 0) - (1 + 0.0632 x 30/360)/(1 + 0.0610 x 30/360) = -0.00018

Thus, for a notional principal of $5 million, the value would be 5,000,000 x (-0.00018) = -$912.03. Thus, the $912.03 would be received by the company from the counterparty because it is short and the rate on expiration is lower than the FRA rate.

Note that the 60-day LIBOR rate is not relevant here.

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**User Contributed Comments**
11

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

danlan2 |
What can I find formulas for this one? |

PhiWong |
((6.32% - 6.10%)x 30/360)/(1 + 0.061 x 30/360) x 5 mil = 912.03 |

dblueroom |
Bravo philwong - I hate FRA and all the interest rate parity relations. |

MonkeySee |
No need to calculte. Intuitively we have to recieve cash as rates have fallen. Only one answer implies this. |

bodduna |
NP{(Ra(exp)-FRA* #M.days/360}/1-Ra(exp)*M. days/360 from long perspective |

bodduna |
i mean 1+expiry rate*M.days/360 |

siggarusfigs |
is it wrong if i did this? (30 day spot - 30 day forward) * notional (0.061*(30/360) - 0.0632*(30/360))*3,000,0000 = -916 ~ -912 |

tylaw |
I agree with monkey see. |

davcer |
Went short, very importante to read carefully |

olympria |
What is 1 x 2 FRA? Is it 1 month into the 2 month? or 2 month into the 1 month? |

rjdelong |
Olympria click the Check LOS button and it shows you, the 1 is how many months long the contract is (months from initiation to expiration), the 2 is how many months until payment is made on the Eurodollar time deposit (months from initiation to payment). |