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In the above mentioned question, the relevant FRA rate is 3-7 = 4.82% and we are told that Awan Co can invest funds at the relevant inter bank rate less 20 basis points (so that’s 0.2% less than LIBOR basically)
So in selecting the FRA BPP revision kit have just picked the FRA in the question and stated that as their final percentage on FRA as 4.82%.
I did 4.82% – 0.20 = 4.62% due to the above mentioned question.
We are told that “Voblaka Bank will offer the FRA” so BPP claims ” as this is an Over the counter product, Voblaka Bank locks final Awan’s rate (LIBOR – 0.20) at 4.82%”
However the examiner got 4.62% in his answer (as I did too) so who is right or are me and BPP both correct? Please explain.
On a separate matter you had stated that you will be uploading videos of past papers worked through showing your approaches to them so far have you reached in this goal?
Thanks
The examiners answer is correct.
I can understand what BPP are saying (because it is an OTC product) but the way it really works is the way that the examiner (and you) have done.
With regard to recording more answers, I have been on vacation in Japan and so although I was still answering questions I was not able to record.
I will be recording more during the next two weeks.Hi sir,
In (a) in the case when interest rates increase to 4.99%
how is that it is a loss on futures market (.9455-.9476) when it should be a gain?Similarly in the case when interest rates fall to 3.19
How is that it is a gain on futures market when it should be a loss because the expected price is higher 96.35 ??We are investing $48m , and shouldn’t it be a gain for us if rates increase?
Thankyou in advance sir
The whole purpose of using futures is for the gain or loss on the futures to ‘cancel out’ the loss or gain on the actual transaction. (Obviously it will not cancel perfectly because of the basis risk, but otherwise it will)
Since they are investing money, if interest rates fall then they will lose on the interest but will gain on the futures. Similarly, if interest rates rise then they will gain on the interest but will lose on the futures.
I do suggest that you watch my free lectures on interest rate risk management, where all of this is explained.
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