Forward Rate Agreement - Mock Test - II, Q#: 71

anirban.dutta
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Forward Rate Agreement - Mock Test - II, Q#: 71

Postby anirban.dutta » Mon May 12, 2014 8:09 am

Suppose an FRA is of value (approx.) $7165 for the period between 3 to 6 months on a principal of $ 1mn. The spot rate for 6 month LIBOR is 5% and FRA pays 10% (quarterly compounding). Find out 3 month LIBOR spot rate.

Options:
A. 3%
B. 7%
C. 5%
D. 2.5%

edupristine
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Forward Rate Agreement - Mock Test - II, Q#: 71

Postby edupristine » Thu May 15, 2014 8:04 am

Value = $1mn *(.1 - Rfwd)*(0.5 - 0.25)*e-(0.5)*0.5 = 7165

Rfwd = 0.706 = 0.05 + (.05 - r)*(1/(2-1))

r = .0299 = 3%

edupristine
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Postby edupristine » Thu May 15, 2014 8:04 am

Value = $1mn *(.1 - Rfwd)*(0.5 - 0.25)*e-(0.5)*0.5 = 7165

Rfwd = 0.706 = 0.05 + (.05 - r)*(1/(2-1))

r = .0299 = 3%


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