- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 33. Pricing and Valuation of Forward Commitments
- Subject 4. Interest Rate Forward and Futures Contracts

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**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.

L

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%

L

_{0}(h) = L_{0}(90) = 5.10%, and L_{0}(h + m) = L_{0}(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%

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**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 |