In FRA, when we have a positive value lets say on long fra, why do we have to discount it to the present value by taking the rate of the loan term… Is it because it assumes that we’ll receive the payment at the end of the loan term? Looks like… BUT. i think in FRA, the settltement happens at the expiration of the FRA contract and not at the end of loan term unlike an interest reate swap where we receive net savings at the end of the loan term… So there is no need to disount it back in FRA…
Am referring scheweser only… does it say the same thing in curriculum also or as per my understanding as stated aboove…
FRAs are typically settled on the expiration of the FRA/beginning of the loan date. Because the interest difference would be earned at the end of the loan period, it has to be discounted to the beginning of the loan period for settlement on that date.
Remember to discount it at the market (LIBOR) rate, not the strike rate in the FRA. You always discount at real-world rates, not at some artificial rate to which two idiots agreed at the inception of the FRA.
“FRAs are typically settled on the expiration of the FRA/beginning of the loan date” - Doesn’t that mean, we actually pay/receive the interest difference on the expiration of the FRA/beginning of the loan date. If so, where’s the question of interest rate being earned at the end of the loan period.
Also Mr Magic - just one stupid question - Where do i get these Mocks… I keep reading the Posts of doing Mocks Currently, Done with Mocks, etc…?? All i know about Mocks is 1 mock paper available from the institute’s site… and two books of practise qusetions of Scweser…
If you enter into, say, a 3 × 9 FRA, then at the end of 3 months you know the fixed rate (it was established at the inception of the FRA), and you know the 6-month LIBOR rate, so you know the net payment that would be paid (and by whom) at the end of the loan period. Instead of waiting another 6 months to make that payment, it is discounted 6 months (at the 6-month LIBOR rate) and settled at the end of month 3.
