mikey10011
New Member
David,
In your screencast you calculated the value of a 3x9 FRA that locked in LIBOR@ F=3%. Three months later the prevailing 6-month spot rate was ST=4%. To calculate the amount to be settled in cash you discounted the net value H33 by 4% over 6 months
PV = 1/(1+ 4% x 0.5)
Jorian FRM Handbook (p. 187) presents a similar example except that he is calcuating the value of a 6x12 FRA that was locked in F=5%. Six months later the prevailing 6-month spot rate was ST=3%. To calcuate the amount to be settled in cash Jorian discounted the net value using a "4% value factor."
Question: Computationally what is the "4% value factor" in this case? And shouldn't Jorian be discounting the net value by ST=3% (and if so is this an errata by Jorian)?
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Also a side question, on calculating PV. Jorian FRM example 1.1 (pp. 5-6) asks to calculate the effective annual rate (EAR) of a bond that will be maturing in 1 month. He uses Equation (1.1)
PV = 1/(1 + EAR)^T
We are given PV=0.987 and he plugs in T=1/12 to solve for EAR. Now if we use EAR=4% for 6-month LIBOR per your screencast, why am I not using
PV = 1/(1+4%)^(6/12) ?
In your screencast you calculated the value of a 3x9 FRA that locked in LIBOR@ F=3%. Three months later the prevailing 6-month spot rate was ST=4%. To calculate the amount to be settled in cash you discounted the net value H33 by 4% over 6 months
PV = 1/(1+ 4% x 0.5)
Jorian FRM Handbook (p. 187) presents a similar example except that he is calcuating the value of a 6x12 FRA that was locked in F=5%. Six months later the prevailing 6-month spot rate was ST=3%. To calcuate the amount to be settled in cash Jorian discounted the net value using a "4% value factor."
Question: Computationally what is the "4% value factor" in this case? And shouldn't Jorian be discounting the net value by ST=3% (and if so is this an errata by Jorian)?
---------------------------------
Also a side question, on calculating PV. Jorian FRM example 1.1 (pp. 5-6) asks to calculate the effective annual rate (EAR) of a bond that will be maturing in 1 month. He uses Equation (1.1)
PV = 1/(1 + EAR)^T
We are given PV=0.987 and he plugs in T=1/12 to solve for EAR. Now if we use EAR=4% for 6-month LIBOR per your screencast, why am I not using
PV = 1/(1+4%)^(6/12) ?