Question #69
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 28
Status: Unattempted
Correct Answer: A
Question
The price of a 3 × 5 forward rate agreement (FR
Answer Choices:
A. 2-month implied forward rate 3 months from today
B. 3-month implied forward rate 5 months from today
C. 2-month implied forward rate 5 months from today
Explanation
The notation for FRAs is unique. There are two numbers associated with an FRA: the
number of months until the contract expires and the number of months until the
underlying loan is settled. The difference between these two is the maturity of the
underlying loan. For example, a 3 × 5 FRA is a contract that expires in three months (90
days), and the underlying loan is settled in five months (150 days). The price of the 3 × 5
FRA is calculated by annualizing the implied forward rate. The implied forward rate is
calculated from the 3-month rate and the 5-month rate.