Question #72 - Reading 30 Pricing and Valuation of Forward Commitments

Reading: Reading 30 Pricing and Valuation of Forward Commitments

PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf

Page: 30

Status: Unattempted

Shared Context

- Which of Williams' statements regarding FRAs is most likely correct? A) Only Statement 2 is correct. B) Neither statement is correct. C) Only Statement 1 is correct.

Question

Using the price and predicted MRR rates in Exhibit 1, which of the following is closest to the predicted value of the FRA at the year end?

Answer Choices:

A. –$100,000

B. –-$85,000

C. –$62,000

Explanation

Typesetting math: 100% The year end is 30 days away. At that point the required FRA would be a 1X4 (90 days borrowing in 30 days' time). To value the FRA, first price this FRA to compare to the current FRA price. 30 day MRR at year end 3.9% × 30/360 = 0.325% 120 day MRR at year end 4.5% × 120/360 = 1.5% FRA price = 1.015/1.00325 – 1 = 0.01171 Quoted annually = 0.01171 × 360/90 = 0.046848 = 4.685% Value = (3.8% – 4.685%) × $28.5 million × 90/360 = –$63,056 Discounted to year end = –$63,056/1.015 = –$62,124

Actions

Practice Flashcards