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Define the forward rate agreement of interest, r X . Let f (T 1 , T 2 ) denote the forward rate over the period

Define the forward rate agreement of interest, rX. Let f (T1, T2) denote the forward rate over the period [T1, T2] and r1 be the continuously compounded T1-maturity rate. Show that the value of a FRA is given by:

Vt = e-r2T2 P [rX f (T1, T2)] (T2 T1)

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