CFA Practice Question

There are 206 practice questions for this study session.

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 ______.

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.

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.
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