FRM Mock Test May 13 Q47

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Joined: Wed Apr 04, 2012 12:33 am

FRM Mock Test May 13 Q47

Postby kspoon » Wed May 16, 2012 5:22 am


For the explanation of Q47, what exactly is "R forward with quarterly compounding"?

Is that the LIBOR rate between month 3 and month 6?

Also how exactly did you get the first term ((2550*e^(0.0580)(0.50)/((0.5-0.25)*3000000))?

How does this related to the forward rate formula given by the book: R(1,3) = (R2T2 - R1T1) / (T2-T1)?



Finance Junkie
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Re: FRM Mock Test May 13 Q47

Postby suresh.wadhwani2009 » Wed May 16, 2012 10:12 am

Dear Kelvin,

the first term comes from the equation of FRA:


here the value of FRA is 2250
Rk is the rate trader is paying, R2 is the 6 months LIBOR rate, L is the amount

put these values in above formula you will get the first term as well as Rm.

convert the Rm into continuous compounding, u will get approximately 6.30%. It is the rate which trader is recieving.

now calculate the 3 month LIBOR rate using below formula


u will get the ans as 5.30%

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