Find the approximate market value of a long position in an FRA at a fixed rate of 5 percent in which the contract expires in 20 days,the underlying is 180-day LIBOR,the notional principal is $25 million,the 20-day rate is 7 percent,and the 200-day rate is 8.5 percent.
A)$433,658
B)-$454,954
C)$322,819
D)-$322,819
E)$454,954

Question

Quizplus · Accepted Answer

The correct answer is A because the market value of the FRA is the difference between the fixed rate and the forward rate, multiplied by the notional principal and the number of days in the contract. In this case, the fixed rate is 5%, the forward rate is 7%, the notional principal is $25 million, and the number of days in the contract is 20. Therefore, the market value of the FRA is (5% - 7%) * $25 million * 20 / 360 = $433,658.

Find the Approximate Market Value of a Long Position in an FRA