Calculating Price of an FRA example, regarding, reference, price

dmrktrading

This is in reference to the example on pg 210-11 of Schweser Book 5 (SS16, Reading 60) regarding calculating the price of an FRA.

After calculating the unannualized rates for the 30 and 120-day loans, why do you then divide the unannualized 120-day value by the unannualized 30-day value?

yospaghetti

haha - suck it up, open the books, bash some calcs....no point hiding from it!

SeanWest

i cant beleive im still on here a year later....

benbenxiong

the show NY Wrote:
-------------------------------------------------------
> tikkigod Wrote:
> --------------------------------------------------
> -----
> > green360 Wrote:
> >
> --------------------------------------------------
>
> > -----
> > > ok, but why? am trying to understand the
> logic
> > > behind it.
> >
> >
> > you are discounting the 90 day unannualized
> rate
> > by the 30 day unannualized rate to get the
> present
> > value.
>
>
> No. Discounting 120 by 30 to get 90. The goal is
> to find the 90 day rate. You want to find a 90
> day rate such that investing for 30 and rolling
> over at 90 is the same thing as investing for 12.
> If this doesnt hold you have arbitrage whch is no
> good. So to get the 90 day rate you have to
> discount the 120 day rate by 30 days.


Wow! Thanks for correcting me. I should really look more closely at the underlying meanings rather than just memorizing the formulas. I think I'll review some derivatives tonight.

Swanand

no prob thats what we are here for. what i wrote above is something i learned/read on this forum about a week ago so im glad it came full circle.

Uranus08

tikkigod Wrote:
-------------------------------------------------------
> green360 Wrote:
> --------------------------------------------------
> -----
> > ok, but why? am trying to understand the logic
> > behind it.
>
>
> you are discounting the 90 day unannualized rate
> by the 30 day unannualized rate to get the present
> value.


No. Discounting 120 by 30 to get 90. The goal is to find the 90 day rate. You want to find a 90 day rate such that investing for 30 and rolling over at 90 is the same thing as investing for 12. If this doesnt hold you have arbitrage whch is no good. So to get the 90 day rate you have to discount the 120 day rate by 30 days.

maryli

So what I don't get is that since we're trying to calc the 90-day rate..why are we using the 120-day rate in the numerator?

yodacaia

That's the very basics of how you get the price of a FRA

eoin

green360 Wrote:
-------------------------------------------------------
> ok, but why? am trying to understand the logic
> behind it.


you are discounting the 90 day unannualized rate by the 30 day unannualized rate to get the present value.