Question #7
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 3
Status: Unattempted
Question
Calculate the price (expressed as an annualized rate) of a 1x4 forward rate agreement (FR
Answer Choices:
A. 7.47%
B. 6.86%
Explanation
A 1x4 FRA is a 90-day loan, 30 days from today.
The actual rate on the 30-day loan is: R30 = 0.05 x 30/360 = 0.004167
The actual rate on the 120-day loan is: R120 = 0.07 x 120/360 = 0.02333
FR (30,90) = [(1+ R120)/(1+ R30)] – 1 = (1.023333/1.004167) – 1 = 0.0190871
The annualized 90-day rate = 0.0190871 x 360/90 = .07634 = 7.63%