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Matori

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tT
发表于 2013-4-10 23:26 | 只看该作者

Interest rate floor for LIBOR - Exam 3 pm

discounted, understand, absolute, interest
I don’t understand question 93 in the pm Exam 3:
If 1-year LIBOR at the end of year 2 is 5.8%, the absolute value of a position (long or short) in the 2-year, 6%, $30 million interest rate floor at the end of year 2 is closest to:
A. $56,711
B. $60,000
C. $63,480
Can someone please tell me why the payoff needs to be discounted? It’s not like it’s a FRA.
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cyber21

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发表于 2013-4-10 23:27 | 只看该作者
I’m assuming it’s because the rates given are for the next period so we have to discount them to today to find the value.
And yeah, I got A as well.

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former

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3#
发表于 2013-4-10 23:27 | 只看该作者
Thanks guys! Think I need to review my FRA basics :s

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svgleeson

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4#
发表于 2013-4-10 23:28 | 只看该作者
This isn;t FRA – it is Interest rate stuff - chapter after Options (or possibly pushed into the options chapter) in Schweser.

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dontknow1987

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5#
发表于 2013-4-10 23:28 | 只看该作者
in CFAI Volume6 page 304, they do not discount it. Anyone here can help!!!

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dkishore1

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6#
发表于 2013-4-10 23:29 | 只看该作者
The problem in the book - they are calculating what the payoff will be at the date of the settlement. In this one - you are calculating the value of the floor / cap - as of TODAY. So you need to discount the amount you would get at maturity - to today using the interest rate.

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