Valuing FRA before expiration

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Bronson Charley

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I am using the Schweser methodology to value FRA before maturity:
1. (new forward price - original forward price) adjusted for time X notional amount and all of that discounted with newest rate
I cannot get the correct results in the CFA curriculum:
- under problem 9B on page 49 practice problems (book 6 CFA)
-and the example in the cfa book as well (CFA seems not to discount the difference to arrive to the FRA current value)
Has anyone solved these two problems with Schweser methodology?
Thank you
 
I looked at the article and it is the same methodology from Schweser - the one that I am using:
CFA book 6 page 37 example 4 (FRA valuation before maturity):
1X7 FRA
Original FR price = 6.19%
New FR price 20 days into the agreement after the change in rates:
On 20th day:
10-day rate:5.45%
190- day rate: 5.95%
Using this, new FRA rate is 5.9716% (1+5.45%*10/360)(1+new rate*180/360)=(1+5.95%*190/360)
(5.9716-6.19)*180/360*20mil=-21,840 not even discounted
or if you use CFA’s rounding you get 0.11%*20 mil = 22000 but this is not discounted.
Can someone have a look and advise?
Thanks
 
I think the formula for valuing the FRA that the CFA curriculum uses in the example already has the present value baked into it so there is no need to discount it. In Elan’s notes they show both methods for calculating the value, and I personally think the formula provided in the curriculum is easier.
 
I prefer the schweser method; it makes more sense to remember it and i’d like to use it but it does not give the same result as CFA formula; it could be in the decimals;
I am not sure on how many decimals should i set the calculator; changing for only 1 gives a very different result on FRAs
 
Bronson Charley wrote:
I looked at the article and it is the same methodology from Schweser - the one that I am using:
CFA book 6 page 37 example 4 (FRA valuation before maturity):
1X7 FRA
Original FR price = 6.19%
New FR price 20 days into the agreement after the change in rates:
On 20th day:
10-day rate:5.45%
190- day rate: 5.95%
Using this, new FRA rate is 5.9716% (1+5.45%*10/360)(1+new rate*180/360)=(1+5.95%*190/360)
(5.9716-6.19)*180/360*20mil=-21,840 not even discounted
or if you use CFA’s rounding you get 0.11%*20 mil = 22000 but this is not discounted.
Can someone have a look and advise?
Thanks
Click to expand...
new FRA rate = (1+5.95%*190/360) / (1+5.45%*10/360) - 1 = 2.9844%
annualized rate = 2.9844 / 180 * 360 = 5.9687%
value in 190 days = (5.9687% - 6.19%) * 180 / 360
 
I too am stuck at this. Why aren’t they discounting it? Logic says that you should as you won’t receive it right now and the value we want is right now.
 
Not really sure how you are going wrong, you are talking about 9 part C right?
Using the scheiser method I get the right answer.
Original price = .0603
New price = (1+.0615*315/360) / (1+.0590*135/360) - 1 = .0310, .031*2 = .0620
10,000,000*((.0620/2-.0603/2))/(1+.0615*315/360) = 8066
 
The answer in CFA books:
Book 6 page 49 problem 9C: $8,100
Book 6 page page 37 example 4: $22,000
A lot of new and old posters here seem to be confused with the CFA results. It looks like CFA is not discounting the interest savings or uses inconsistent decimal rounding.
Has anyone gotten these results using Schweser method to value FRA before maturity? (new FRA rate - original rate) adjusted for time and discounted with the newest LIBOR rate?
 
CFAI is discounting it, if you work through the example it will come out correctly (so long as the rounding is done the same).
 
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