Question
I am studying and Got stuck on this because it says where holder pays... I have done problems where holder receives... Not familiar with where
I am studying and Got stuck on this because it says where holder pays... I have done problems where holder receives... Not familiar with where they pay fixed interest. Any help would be appreciated.
The LIBOR yield curve is flat at 7% per annum. An FRA is designed where the holder pays fixed interest at the rate of 7.2% per annum for a 6-month period on a principal of $10 Million starting in three years.
Note that all rates are quoted with semi-annual compounding.
What is the cash flow that is settled at the three-year point? Is it a cash inflow or a cash outflow to you?
What is the current value of an FRA?
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