CFA Mock Exam, FRA question discounted, question, interest, solution

tarunajwani

On the Mock Exam, there is a Derivatives question related to a 1 X 3 FRA, which basically means settlement occurs in 1 month, payoff is dependent on the present value of interest savings discounted at 90 day LIBOR (since X3 refers to 3 months = 90 days). In the solution set, the exam uses 60 day LIBOR, which makes absolutely no sense since its a 1 X 3 FRA, anyone else come across this issue? This is the Afternoon Mock, Question 94, fairly certain this is an error.

bluejazzy

3 represents the termination date, 1 represents when it is effective.
So it is effective 30 days from now and terminates in 90 days. This means we use 60 day LIBOR.

AndyNZ

mnieman is right
An 3 x 9 FRA expires in 3 months. Once it expires, the hypothetical 6 month loan starts. In this case we use 180 day LIBOR on expiration to calculate the payoff as well as to discount the FV.

Dapper425

Okay, got it, thanks guys.