Question: Am I on the right track to solve this problem? = (FRA Rate - LIBOR) x Principal (calculated on a semi-annual basis)?? 7.2 % -

Am I on the right track to solve this problem?

= (FRA Rate - LIBOR) x Principal (calculated on a semi-annual basis)??

7.2 % - 7% x 10,000,000

The LIBOR yield curve is flat at7%per annum.An FRA is designed where the holder paysfixed interest at the rate of7.2%per annum for a6-month period on a principal of$10Million starting in three years.

Note that all rates are quoted with semi-annual compounding.

#1)What is thecash 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?

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