R39 Risk Management - Error - Schweser 2011, reference, however, Error

DarienHacker

P90 Book 4 they take (Libor - reference rate) in calculating the pay off however shouldn't that be the loan rate - reference rate??

Any help greatly appreciate.

Cheers



Edited 1 time(s). Last edit at Monday, February 7, 2011 at 01:43PM by mambovipi.

zwjy

no it shuld be loan rate minus reference rate because you lock in at reference rate, so if the rate increases you "win" because you get to borrow at reference while the market rate is higher.

however i noticed another thing here that i thuoght may be an error. on page 90 they use the libor rate in the calc (i believe it was 6%).

but in the concept checkers (i forgot which question, i think 2nd or 3rd to last), they have same exact problem but in the calc they use libor + basis point addon rather than just libor.


one of these ways must be wrong--any clue on the contradiction?