CFA Practice Question

There are 227 practice questions for this study session.

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%

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
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