- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. 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 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.

L

_{0}(h) = L

_{0}(90) = 5.10%, and L

_{0}(h + m) = L

_{0}(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%

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**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. |