FRA Question

Good Student
Posts: 21
Joined: Fri Aug 17, 2012 3:27 pm

FRA Question

Postby d2syh » Thu Nov 08, 2012 3:11 pm

Suppose you traded a FRA 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.
Choose one answer.
a. 3%
b. 7%
c. 5%
d. 2.5%
The correct answer is 3%.
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%

Pls explain ...
Is discount factor e^-0.05*0.5 being used?


Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: FRA Question

Postby swarnendupathak » Thu Nov 08, 2012 3:35 pm

Yes, the discount factor of 0.05 for 6 months with continuous compounding was used here...I think the rfwd is a quarterly compounding rate, hence to calculate the 3 months spot rate we need to modify it to continuous compounding as 6-month libor is continuous compounding.
Please make me correct if i am wrong.


Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: FRA Question

Postby content.pristine » Fri Nov 09, 2012 5:38 pm

Thats right swarnendu.
That is nothing but the discount factor

Return to “FRM Part I”



Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.