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 6 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 6 FRA?
A. 4.93%
B. 5.37%
C. 5.15%
Explanation: Here the notation would be: h = 90, m = 90, and h + m = 180.
L0(h) = L0(90) = 5.10%, and L0(h + m) = L0(180) = 5.27%
FRA(0, h, m) = FRA(0, 90, 90) = [(1 + 0.0527 x 180/360)/(1 + 0.051 x 90/360) - 1] x (360/90) = 5.37%

User Contributed Comments 3

User Comment
danlan2 Since 90 day rate is lower than 180 day rate, the result should be higher than 180 day rate, so B is the only possible answer.
ramdabom danlan2 can you elaborate?
broadex Spot Rate(180)=Spot Rate(90)x Forward Rate
If Rate(90) is less than Rate (180) obviously forward rate should be more than both rates.
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