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 amount 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

To calculate the approximate market value of a long position in an FRA, we use the following formula:

FRA Value = Notional Amount x Days/360 x (Agreed Rate - Forward Rate)

Days/360 = 20/360 = 0.0556

Agreed Rate = 5%
Forward Rate = 180-day LIBOR in 20 days (i.e. 20-day rate) = 7%

FRA Value = $25,000,000 x 0.0556 x (5% - 7%) = -$433,658

Note that the negative sign indicates a liability for the long position.

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