## FRM Mock Test May 13 Q47

kspoon
Posts: 6
Joined: Wed Apr 04, 2012 12:33 am

### FRM Mock Test May 13 Q47

Hi,

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)?

Thanks,
Kelvin

Tags:

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

### Re: FRM Mock Test May 13 Q47

Dear Kelvin,

the first term comes from the equation of FRA:

L*(Rm-Rk)*(T2-T1)*exp(-R2*T2)=value

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

R2+(R2-R1)*(T1/T2-T1)

u will get the ans as 5.30%