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Joined: Tue May 12, 2015 7:42 am


Postby sun.7674 » Tue May 12, 2015 12:20 pm

Question related to CFA level 1- Topic is Derivative.

A forward rate agreement (FRA) that expires in 180 days and is based on 90 day
LIBOR is quoted at 2.2%. At
expiration of the FRA, 90 day
LIBOR is 2.8%. For a notional principal of USD1,000,000, the payoff of this FRA is
closest to:

So after 180 day when the contract expire, i would simply get USD 1,000,000 ( 2.7% - 2.2%) * 90/360 days.
My question is, why is it required to discount it with 1+( 2.8% * 90/360 days) ? Bank will simply pay me that amount at expire (after 180 days).

Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am

Re: Derivative

Postby edupristine » Sat May 16, 2015 3:34 am

As i can see in this example the bank will pay you 12500 after 180 days when the contract expires, But we will get this value after 180 days and we need to calculate the present value of the same, so the present value of 12500 is equals to 12413 :- 1+(2.8%*90/360).

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