Suppose a lender enters into an FRA, where the lender will receive 9%, measured with annual compounding, for the fourth year and pay LIBOR on a principal of $15,260.

The forward LIBOR rate (annually compounded) for the fourth year is 9.5%. Suppose that risk-free zero interest rates with continuous compounding are as follows:

Maturity( years)	Rate (% per annum)
1	2
2	3
3	4
4	6
5	7

 

1) What is the forward rate for the 4^th year? (sample answer: 2.50%) 

2) What is the cash flow to the lender at the end of the term(at T=4)? (sample answer: $25.50 or -$25.50)

3) What is the Value of the FRA to the lender (at T=0)? (sample answer: $25.50 or -$25.50) 

Answer rating: 100% (QA)

PLEASE THUMBS UP IT IS VERY MOTIVATING IF ANY ISSUE IN ANSWER W... View the full answer