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There are 3 requirements of part a
-Forward rate Agreement
1-How we determine that FRA of 3-7 month (4.82)is to be use, i mean since we will be investing the money on 1-feb and on 1-june we have planned the project so we should use 3-4 month (4.78)2-Assume rate is increase by 0.9%
I did not understand why the 4.99% is used in $48(4.99-4.83)=27200
According to me instead of 4.99%, 4.79%(4.09-0.9-0.2) should be used.
Why we are not deducting 0.2%, Since company can invest 0.2% lower than inter bank rate.-Future Contracts.
1-Future contract of march is taken, it is given that money will be required for project on 1-June so June future should be taken, NOT march. What is logic of using march future?2-In forecasting the price of future at the transaction date the total number of month taken are 5. It should be 4 i.e Feb March, April and June
Options (figures quotes below are on the assumption that the interest rate increase by 0.9%)
1- The forecast price of option at the transaction date(the price of Selling which is 94.5 ) is the price calculated by using the future prices i.e same figures has been uses for options. How is this?Sorry but unless you say which Kit you are asking about I cannot help you!
(if it is BPP then I can find it, if it is Kaplan or Becker then I cannot).
Have you actually watch my free lectures on interest rate risk management?
Sir it is BBP kit, question name is Awan co.
Yes. I have watch your complete lectures of whole risk section, and also practiced example given in notes so many times that i know each and every point of example, but didnt know why still get confuse.
1 a 3-7 FRA means that it starts in 3 months time and finishes in 7 months time (which is what we are after here)
2. With an FRA the settling up with the bank is at the difference between the FRA rate and whatever the interbank rate is.
3. With interest rate futures you are protecting against the risk of the interest rate changing between ‘now’ and the start of the deposit (once the deposit starts it will be at fixed interest. They will start the futures deal on 1 November and finish on 1 February – therefore it is March futures.
4. No – it is 5 months (from 1 November to 31 March)
And how the value of future is use in option?
i.e the same forecast price of future has been use as a forecast price of option.
The forecast price are 94.55 and 96.35.Interest rate options are the right to buy or sell interest rate futures at a fixed price – they are the same futures (and we are not using them to forecast the price of an option).
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