A $100 notional 6×12 FRA has the following features at inception. The first six month period is 182 days and the second is 183 days. The locked-in rate on the FRA is 6%. After one month the 5×11 FRA is trading at a fair strike of 6.2% with 151 days in the first five month period. What is the value of the FRA to the buyer if the five-month Libor rate at this point is is 5%?
A) (+0.0965)
B) (?0.0965)
C) $+ 0.0986$
D)( -0.0986)

Question

Quizplus · Accepted Answer

The value of the FRA to the buyer is calculated by finding the difference between the locked-in rate and the new fair strike rate, adjusted for the time periods and the notional amount. The calculation involves discounting the difference in interest payments over the remaining period. The positive value indicates a gain for the buyer.

A $100 Notional 6×12 FRA Has the Following Features at Inception