The following data is observed from the bond market. All coupon-paying bonds pay coupons semi-annually, and other
Question:
The following data is observed from the bond market. All coupon-paying bonds pay coupons semi-annually, and other bonds in the market use the semi-annual convention. Prices are expressed as a percentage of face value.
Question 1: Today is October 15th, 2020. Your client has asked you to create a Forward Rate Agreement (FRA) for them. They wish to lock in the borrowing rate on $350,000 for six months, beginning in one year. Design the contract for your client. Be specific regarding the parameters and the rate.
Question 2: Two months have passed since Question 1 above. It is December 15th, 2020. The 10-month spot rate, expressed with continuous compounding is 0.37%. The 16-month spot rate, expressed with continuous compounding, is 0.40%. What is the value of the FRA that you designed for your client two months ago from the viewpoint of your firm (not from the viewpoint of your client)?