Interest rate floor for LIBOR - Exam 3 pm discounted, understand, absolute, interest

Matori

I don’t understand question 93 in the pm Exam 3:
If 1-year LIBOR at the end of year 2 is 5.8%, the absolute value of a position (long or short) in the 2-year, 6%, $30 million interest rate floor at the end of year 2 is closest to:
A. $56,711
B. $60,000
C. $63,480
Can someone please tell me why the payoff needs to be discounted? It’s not like it’s a FRA.

cyber21

I’m assuming it’s because the rates given are for the next period so we have to discount them to today to find the value.
And yeah, I got A as well.

former

Thanks guys! Think I need to review my FRA basics :s

svgleeson

This isn;t FRA – it is Interest rate stuff - chapter after Options (or possibly pushed into the options chapter) in Schweser.

dontknow1987

in CFAI Volume6 page 304, they do not discount it. Anyone here can help!!!

dkishore1

The problem in the book - they are calculating what the payoff will be at the date of the settlement. In this one - you are calculating the value of the floor / cap - as of TODAY. So you need to discount the amount you would get at maturity - to today using the interest rate.