Valuing an FRA prior to maturity

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thegooddocta

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This could be a long shot, but any help would be appreciated.
In doing some problems in Schweser vs. the CFAI books it looks like they have conflicting ways to calculate the value of an FRA prior to maturity.
I have been trying to do EOC’s for these type of problems the Schweser way and am not getting the correct answers. Is there a conflict here or am I missing something?
 
Say we are at g and FRA mature on h for m duration.
get PV of $1 at h to g. This is what long receive.
Get PV of (1+ FRA rate) to g by discounting LIBOR(M+h-g). This is what long receive.
Net those and get the value.
 
I was going to make this exact same post. There is no way i can see to get the CFAI answer using the schweser technique. With less than 2 days before the exam I’ve just memorized the CFA way to value the FRA prior to maturity. The schweser way intuitively makes a million times more sense to me, but I figured I’d better be safe than sorry and learn the cfa way.
If anyone can explain why the two methods do not yield the same result it would be greatly appreciated.
 
I can’t believe I didn’t pick up on this prior to now. The CFAI way is pretty easy to memorize so I went that route as well. Certainly frustrating to see contradictions like this.
 
Tell me about it! I was so confident with FRA’s until I tried the CFAI questions last week and was like WTF. Totally discouraged me, but hey, it is what it is. Good luck to you, I hope others noticed this as well.
 
roughly how far out are the numbers you end up with…are we talking a vague rounding error?
Enough for it to be B and not A or C on the answer sheet?
 
perdition Wrote:
——————————————————-
> roughly how far out are the numbers you end up
> with…are we talking a vague rounding error?
>
> Enough for it to be B and not A or C on the answer
> sheet?
far enough that it’s not a rounding error
 
As long as you can solve the new FRA rate, finding the value vs. previous rate is not too bad. Subtract the new rate from previous rate, unannualize by multiplying loan term/360, times notional, then discounting with new, longer term rate (remaining FRA term/360).
 
Can someone post the CFA formula? I recall it’s a bit different. It also helps iron out some of th rounding problems. Less intuitive though.
 
Hhhmm..I have used the same method as Jgrandits and haven’t encountered real problems up ‘til now….all a little 11th hour isn’t it?
 
And note, they only yield different results because of rounding. It’s usually off by 1 basis point
 
@perdition - after we’ve found the new FRA rate and subtracting from previous rt, do we unannualize by multiplying ‘loan term/360’ or is it always ‘90/360’ before discounting back to present in final step? Most examples seem to be based on 90 day loan, what if loan was for six months? Thks
 
The Schweser method *does work* for the CFAI. After a couple hours on this finally got these to work out. Make sure you use 360-day counts and exponents
Also, rounding will lead to differences of a couple $100
 
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