Question
The LIBOR yield curve is flat at 6% per annum. An FRA is designed where the holder receives fixed interest at the rate of 8%
The LIBOR yield curve is flat at 6% per annum. An FRA is designed where the holder receives fixed interest at the rate of 8% per annum for a 6-month period on a principal of $1Million starting in two years. Note that all rates are quoted with semi-annual compounding.
1) What is the cash flow that is settled at the two-year point? Is it a cash inflow or an cash outflow to you?
2) What is the current value of an FRA?
1) +$10,000; cash inflow | ||
1) +$9,708.74; cash inflow | ||
1) -$10,000; cash outflow | ||
1) -$9,708.74; cash outflow | ||
2) value of an FRA = +$8,626 | ||
2) value of an FRA = -$8,626 | ||
2) value of an FRA = +$9,708 | ||
2) value of an FRA = -$9,708 |
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