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Suppose a lender enters into an FRA, where the lender will receive 9%, measured with annual compounding, for the fourth year and pay LIBOR on

Suppose a lender enters into an FRA, where the lender will receive 9%, measured with annual compounding, for the fourth year and pay LIBOR on a principal of $15,260. The forward LIBOR rate (annually compounded) for the fourth year is 9.5%, Suppose that risk-free zero interest rates with continuous compounding are as follows:

Maturity( years) Rate( % per annum) 1 2 2 3 3 4 4 6 5 7 What is the forward rate for the 4th year? (sample answer: 2.50%) What is the cash flow to the lender at the end of the term (at T=4)? (sample answer: $25.50 or -$25.50) What is the Value of the FRA to the lender (at T=0)? (sample answer: $25.50 or -$25.50)

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