You are the borrower in an FRA where you will pay 5% (annual compounding) for the third year on $1 million. (1) The current forward interest rate for the third year is 5.1% (annual compounding). The 3-year zero rate is 4% (annual compounding). What is the value of the FRA to you now? (2) Suppose at the beginning of the third year, the 1-year zero rate proves to be 5.5% (annual compounding). What is the value of the FRA to you at this time?

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