DERUVATIVES

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

DERUVATIVES

Postby chandniwadhwani92 » Tue Oct 14, 2014 6:32 pm

In forward rate agreement at T1 when buyer asked for loan 3 months from now for 6 months at 5,5%
At ti libor is 5%
but at t3 libor increases to 6%
In this case how to calculate profit for long position at T9 when at T9 libor is 4%

At T3 libor is 6%
But at T9 it reduce to 4%
But agreement is of 5.5

While calcualating we need to consider T9 rate or T3 when loan amount is exchanged

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

DERUVATIVES

Postby edupristine » Fri Oct 17, 2014 7:17 am

Profit for the long position = Payment to the long (i.e when the rate at settlement > Forward Contract Rate)

Payment for long = (Underlying rate at expiration - Forward contract rate)(days in underlying rate/360)/
1 + underlying rate (days in underlying rate/360)

When the T9 LIBOR is 4%, then the forward contract rate = 5.5%, and the underlying rate = 4%,
here the Underlying rate at expiration is less than the forward contract rate;

hence the long position will be in a loss (Payment to long would be negative as per the formula).

Please note that the loan amount is never exchanged in a Forward Rate Agreement. Always the interest payments are exchanged.


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