Forward Rate Agreement (FRA) Valuation
Suppose that Goldman Sachs enters into a receive-floating 6x12 FRA at a rate of 1.00% on USD 7,500,000. After three months, Goldman wants to close the transaction with an offsetting FRA at 1.25%. The current nine-month market reference rate (MRR) is 0.75%. The value of the original receive-floating 6x12 FRA after three months will be _closest_ to:
No.
The FRA rates are annualized and need to be adjusted.
That's right!
Since both FRA rates are given, use the equation to find the present value of the difference between the rates.
$$\displaystyle \frac{[(0.0125- 0.01) \times \frac{180}{360}]}{[1+0.0075 \times \frac{270}{360}]} = 0.00124$$
So the value of the original Goldman FRA is
$$\displaystyle 7{,}500{,}000 \times 0.00124= 9{,}323$$.
No.
The difference between FRA rates needs to be included in the calculation.
USD 9,305.
USD 9,323.
USD 46,516.
