[ 2009 FRM Sample Exam ] Market risk measurement and management Q1 management, contract, present, period, amount

Babul

 

1. A 90?day futures contract on US LIBOR that expires in one month has a present value per basis?point sensitivity of USD 25. A 1x4 US LIBOR FRA that settles on the same date when the futures contract matures has an FRA period of 90 days, and has the same notional amount as the futures contract would have a present value per basis?point sensitivity of

A. USD 25.

B. greater than USD 25.

C. less than USD 25.

D. more or less than USD 25 depending on the current US term structure.

Babul

 

Correct answer is Cfficeffice" />

A.  The FRA payout occurs in the future and is therefore worth less than 25 dollars

B.  The FRA payout occurs in the future and is therefore worth less than 25 dollars

C.  The change of 25 dollars per basis point is can be realised immediately for a futures contract and hence the PVBP = 25 dollars.  However, the 25 dollars is not paid until settlement in one month for the FRA.  Therefore, the time value of money implies than the PVBP < 25 dollars.

D.  The one month US LIBOR rate determines how much less than 25 dollars the PVBP is but it is always less than 25 dollars.

Reference: ffice:smarttags" />Hull, Options, Futures, & Other Derivatives, Fourth Edition, Chapter 4, Pages 95?97

Type of question: Market Risk

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