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CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities

An investor is long a 90-day FRA with notional principal of 10,000,000 and a contract rate of 3.0%. At expiration, the 90-day Libor is 3.6% (360-day year), and the FRA settles in advance, at the start of the underlying period. The settlement payment received by the long position is closest to:

The long position receives about 14,866. The rate difference of 0.6% over 90/360 of a year on 10 million gives 15,000, and because settlement occurs at the start of the period, this is discounted at 3.6% for 90 days, giving 14,866.

  1. A14,866Correct
  2. B15,000
  3. C59,465

Explanation

Interest difference = (0.036 − 0.030) × 90/360 × 10,000,000 = 15,000, which would be paid at the end of the period. Settlement in advance requires discounting at the current rate: 15,000 / (1 + 0.036 × 90/360) = 15,000 / 1.009 = 14,866. The 15,000 option omits discounting; the 59,465 option omits the 90/360 day-count fraction.

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