Question
Suppose that the one- and two-year zero-coupon bond rates are 3.1% and 3.3%, respectively. i. Determine the rate on a 12x24 forward rate agreement (FRA)
Suppose that the one- and two-year zero-coupon bond rates are 3.1% and 3.3%, respectively.
i. Determine the rate on a 12x24 forward rate agreement (FRA) (12x24 means settlement is a year from now for delivery of the 1-year LIBOR at that date).
ii. A firm bought the above 12x24 FRA on $100 million notional principal and wishes to understand what would occur if at the settlement date (which is one year from the date of purchase of the FRA) one-year LIBOR turns out to be 3%.
Using your same answer in (i), calculate the direction and amount of the settlement cashflows. Explain your answers
b) Determine the rate on a 6x9 FRA if the current 6-month LIBOR rate is 2.10% and the 9- month LIBOR rate is 2.65%.
Use a day count of 182 for the 6-month period and of 91 for the three-month period after that.
c) Determine the rate on a 6x12 FRA if the current 6-month LIBOR rate is 1.65% and the 12- month LIBOR rate is 1.8%. Use a day count of 182 for the 6-month period and 364 days for the 12 months.
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