A bank holds an FRA that was entered into some time ago. Under the FRA terms, the bank agrees to pay fixed 5% p.a. and receive 6 month-LIBOR on a principal of $100m for the period starting in 18 months and ending in 24 months. The bank must revalue the FRA at current market zero rates of 4%, 4.25%, 4.5% and 5% for maturities of 6 months, 12 months, 18 months and 24 months, respectively. All zero rates are quoted with continuous compounding.

a)Calculate the forward rate for 18 months to 24 months implied by the zero curve.

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b)Value the FRA.

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c)Calculate how much has the FRA changed in value from its inception and explain why its value has changed.

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