CFA Level 2 — Derivatives: Valuing Forward Rate Agreement (FRA)

Continuing from my previous post on pricing a Forward Rate Agreement (FRA), we now move into the valuation of a FRA contract.

Steps:

1. Based on the floating rates on the valuation date, recalculate the implied FRA rate (see my post on pricing FRA at https://fabianmoa.medium.com/cfa-level-ii-derivatives-pricing-forward-rate-agreements-fra-ba368044e953).
2. Calculate the payoff at expiration using the difference between the implied FRA rate and initial FRA rate. Then multiply the difference by the notional amount and the number of days in the floating rate divided by 360.
3. Discount the amount in Step (2) back to the valuation date using the discount rate given. If discount rate is not provided, then take the floating rate available that can discount from the payoff at expiration to the valuation date.

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