Question
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%
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.
#1) What is the cash flow that is settled at the three-year point? Is it a cash inflow or an cash outflow to you?
#2) What is the current value of an FRA?
| #1) +9661.84 ; cash inflow | ||
| #1) -9661.84 ; cash outflow | ||
| #1) -10000 ; cash outflow | ||
| #1) +10000 ; cash inflow | ||
| #2) value of an FRA = +9684 | ||
| #2) value of an FRA = -9684 | ||
| #2) value of an FRA = +7860 | ||
| #2) value of an FRA = -7860 |
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