Q:82 Kaplan kit (Dec 2013)

Respected Sir,

I was a bit confused by the solution of part a of the question (Forward rate agreements ) so i solved it my simple way the way i have learnt FRA’s.

FRA 3-7 4.82%
Current Interest rate : 4.09%
Bank has offered to invest at 20 basis points less LIBOR
Case 1: if interest rate goes up by 0.9%

Solution:

Actual Interest (4.09+0.09) = 4.99%
$48,000,000*4.99%*3/12 = 798,400

Difference in FRA and current interest rate
(4.99% -4.82% = 0.17%)
We pay to bank the difference
$48,000,000*0.17%*4/12 = (27,200)

20 basis points reduced on actual interest by bank
=0.20/100*48,000,000*4/12 = (32,000)
———————-
$ 739,200.

The answer is same.Can i use this format in exam.for me its v easy .

Pls advice.

Thanks