Re: Derivative Questions
Ratan Gupta, FRM
Whereas in the currency exchange forward the saving come at the
expiry.
For eg. u have an 2 X 5 FRA, this essentialy mean u will take a loan
for 90 days after 60 days. The loan saving will come at the end 30 * 5
= 150 days where as the FRA expires in 2 * 30 = 60 days, that is when
u take the loan. Since the interest payment is done on 150th day, the
saving that you have got by entering into FRA will need to be
discounted on the 60th day.
Whereas in forward you are not taking a loan, but want to hedge an
already existing loan, the saving will come on the expiration date and
hence no need for discounting.
Q2> Please elaborate this question, i am not able to follow this.
Q3> The rate will be 3.58 + 1.3 = 4.88%, i believe this is quoted as
per annum.
So the 90 day rate will be 90/360 * 4.88%
=> interest will be 1.22% * 1.5 Million
Q4> Whenever we deal with interest rate it is add on. So 2% on $100
mean $2.
In this case however it is discounting, the rate is quoted as 2.4% ,
so it doesnt mean that 2.4% is on 97.6 , which is 2.3424 , but you
know that the interest is 2.4 => so why is this discrepancy ; this is
coming because of the discounting being used and we say that the 2.4%
is on 100. The actual rate is 2.46% , which is more than 2.4% that is
quoted. This is the convention that is being used, but the market
participants use the actual 2.46% rate in all the valuation
calculation.
Hope this helps.
Thanks
Ratan
On Feb 11, 9:31 am, Geetha Vramani <vramani.gee...@gmail.com> wrote:
> Hi Ratan,
>
> Thanks for your answers, its very helpful and sorry for causing any
> inconvenience about schweser. Following are my questions. Please
> advise -
>
> --------------------------------------------------------------------------- -----------------------
>
> Q1) In Currency exchange forward - The payment to be received or paid
> by a party is calculated as the net settlement between the 2
> currencies. To arrive at this amount only Interest savings is
> calculated and taken as final amt. Shouldn't this Interest savings be
> divided by the discounting factor (using of FRA formula) to arrive at
> net settlement?
> --------------------------------------------------------------------------- -----------------------
>
> Q2) If short term yields increase unexpectedly after contract
> initiation, the short will profit on the contract - Please elaborate.
> --------------------------------------------------------------------------- -----------------------
>
> Q3) 90 day LIBOR is quoted as 3.58%. How much int would be owed at
> maturity for a 90 day loan of $1.5 million at LIBOR +1.3%?
> --------------------------------------------------------------------------- -----------------------
>
> Q4) Eurodollar futures are add on yield and not discount yield. A
> euro
> dollar quoted as 97.6 means (100-97.6= 2.4% LIBOR)*90/360 = 0.6
> LIBOR.
> Please elaborate how different is add on value from discounting for
> this example. (As I could not understand the value difference between
> add on & discounting)
> --------------------------------------------------------------------------- -----------------------
>
> Thanks,
> Geetha