The calculation of the payoff of FRA seems to be wrong in that it doesn't take into account the margin. While if you look at the practice #10 on page 120, the way to calculate the payoff is inconsistent as in the example on page 90. Any thoughts?
I think the answer of the concept checker is wrong... the BEY calculated in that way is not consistent with the reference rate given in the question. payoff should be calculated by using LIBOR not the loan rate.
In a FRA agreement the value to the manager is LIBOR - reference rate. In this question LIBOR moved against the manager and went down instead of going up as the manager had expected. Since we know LIBOR decreased the manager will owe the bank and the bank bears the credit risk. The reference rate and LIBOR were switched in the answer to show a positve number indicating the manager owed the bank that amount. Also, at initiation of an FRA the reference rate could be equal to either LIBOR or LIBOR plus the spread. In the example on page 90, at initiation of the FRA, LIBOR equals the reference rate thus the 200bps spread is not used in the answer. Conversely on page 115 Q10 since the reference rate is 5% and LIBOR was initially 3.5% at initiation of the FRA the spread would need to be added to LIBOR so that at initiation the 150 bps spread + 3.5% LIBOR = 5% reference rate. Since the spread was used at initiation of the contract this requires using the 150 bps spread in the answer (3% + 150bps = 4.5%) explanation as shown on page 120.
发表于 2011-3-25 05:13
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