CFA Practice Question

There are 227 practice questions for this study session.

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.
Lg(h - g) = L30(0) = 0%, Lg(h + m - g) = L30(30) = 6.10%
Vg(0, h, m) = V30(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.

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).
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