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Hello Tutor,
I’m a little confusing to the calculation of FRA as I have approached different answers written by the examinerfirst one is PYQ Dec 2013 Q2 Awan Co:
compensation/receipt from the bank = (4·82% – 3·19%)
which the 3.19% is based on the actual int rate of 4.09%-0.9%(could increase or decrease by this much) without less with 20 bp with relevant to Awan Co investing rateThe second one is from a technical article at ACCA website:
https://www.accaglobal.com/vn/en/student/exam-support-resources/professional-exams-study-resources/p4/technical-articles/interestrate-riskmanagement.htmlThe example from Titans FC,
the settlement from FRA is based on LIBOR + 0.90%, due to “Given Titans’ credit rating, the short – term loan will be at a rate of 90 basis points above the LIBOR.”“Currently, LIBOR is at 6%. The bank has also suggested that, due to current economic uncertainty, LIBOR may rise by 1% or even fall by 0.5% over the coming months.”
So the int rate might be ended up with 5.5% or 7%
and add 0.9% become 6.4% and 7.9% respective against with the FRA rate 7.02% rather than use 5.5% or 7% against to 7.02%.
So which method is correct?
Hope I had expressed my concern understandably,Thank you.It is the technical article that is correct.
For the exam question, an FRA will look them into a rate of 4.82% (not 4.62% as in the answer).
Sorry,I have one more question about the FRA
Usually the examiner answer will included “At the start of the contract ,the value of swap will be zero” OR “At the start of the swap, the net present value of the swap receipts based on the variable rates from the bank will be the same as the costs based on the fixed amount paid to the bank. ”1)What does the NPV mean that? Is it mean one gain from the rate will be offset by another one loss?
2)What is the value of the swap?
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