- 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 goes long on an FRA that expires in 30 days, for which the underlying is 90-day LIBOR for a notional of $10 million. A dealer quotes this instrument at 4.5 percent. At expiration, 60-day LIBOR is 3.5 percent and 90-day LIBOR is 4 percent. The payment made at expiration is closest to ______.

B. $12,376 from the dealer to the investor

C. $16,570 from the investor to the dealer

A. $12,376 from the investor to the dealer

B. $12,376 from the dealer to the investor

C. $16,570 from the investor to the dealer

Correct Answer: A

The underlying of an FRA is an interest payment. The investor is long the rate and will benefit if rates increase. Since rates decreased, the investor must pay the dealer: $10,000,000 {[(0.04-0.045)(90/360)]/[1+0.04(90/360)]} = -$12,376.

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**User Contributed Comments**
5

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

farhan92 |
i cant seem to get the right answer plugging the numbers in :/ |

farhan92 |
ahh you do 0.04(90/360) +1 not 1.04(90/360) |

alex2001 |
same error here... |

Logaritmus |
long a FRA => pay fixed receive floating => at the end of 90 days term of LIBOR borrower will have following CFs: Paid fixed: <4.5%*(90/360)>*NA Receive float: <4%*(90/360)>*NA That sums to <0.125%*NA> = <12 500$> at the end of 90 days. We should discount it back till the end of contract so borrower will paid 12500$ discounted back by 90 days (it should be less than 12500$ so choose A without computing). |

ashish100 |
Underlying is the interest determined at expiration if that helps anyone. That threw me off and got answer C instead. |