Question
An FRA ensures that AAA Company will receive a fixed rate 4.5% per annum on a principal of US$10 million for a 3 months period
An FRA ensures that AAA Company will receive a fixed rate 4.5% per annum on a principal of US$10 million for a 3 months period starting in 6 months. The forward LIBOR for that period is 3.1% per annum. The 9-month LIBOR zero rate is 2% per annum with continuous compounding.
a) What is the value of this FRA in US$?
b) If the 3-month LIBOR zero rate in 6 months realizes to be 3.5% per annum, what is the payoff (for the company) settled at the 6 months point?
c) If the 3-month LIBOR zero rate in 6 months realizes to be 5% per annum, what will be the payoff (for the company) if the transaction is settled at the 9 months point?
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