Reading 47 Q10

CFA Level II Derivatives
#1

Part A

It says the manager wants to go short on an FRA that expires in 90 days and is based on 90 day LIBOR.

Initially, I thought ok so the FRA matures in 3 months and starts today (since he is applying 90 day LIBOR) - so the answer would be 0 x 3 FRA.

However the answer is 3 x 6 FRA. Why is the first term 3 and not 0? Is it to do with the fact he is going SHORT?

Part C

What;'s with the workings in the answers? It looks like a rearrangement of what I’m doing but I get different answers too.

I was able to calculate the market rate fine to match answers and then got stuck… Below is my working.

[(0.0562-0.0619)*(90/36)*15 mil]/(1 + 0.0562*90/360).

#2

An m × n FRA expires m months from inception; the loan period ends n months from inception of the FRA.

So . . . if it expires in 90 days and is based on 90-day LIBOR, then m = 3 and n = 3 + 3 = 6: it’s a 3 × 6 FRA.

(Note that what you call the FRA doesn’t depend on whether you take the long position or the short position; it’s a 3 × 6 FRA for the long and a 3 × 6 FRA for the short.)

I wrote a couple of Level II articles on FRAs that may be of some help here: