EoC. Q 13.
Why is the New FRA rate that’s computed, being discounted back 180 days? Shouldn’t it be discounted just 90 days? (Since this is the rate for a 90 day FRA 90 days from now)
The loan period starts in 90 days and lasts 90 days; therefore, the loans are paid in 180 days, so we have to discount the payment 180 days to get its value today.
Perhaps you’re thinking that because its settled in 90 days (at the expiration of the FRA: the start of the loan period) it should be discounted for only 90 days. What you may be forgetting is that the settlement amount in 90 days is the payoff discounted from the end of the loan period to the beginning of the loan period: another 90 days.
You, Sir , are such a saviour!
Should I take it as a general rule then, to discount for the full loan period + FRA period until present?
Yup.
And you are too kind.