Question: Suppose that zero interest rates are per annum with continuous compounding are as follows: Maturity (years) Rate (% per annum) (1, 2.5) (2, 3.0) (3,

Suppose that zero interest rates are per annum with continuous compounding are as follows: Maturity (years) Rate (% per annum) (1, 2.5) (2, 3.0) (3, 3.5) (4, 4.2) (5, 4.7) Calculate 1-year forward interest rates for the second (f1,2), third (f2,3), fourth (f3,4), and fifth (f4,5) years.

Use the rates in the previous part to value an FRA today as the borrower with 5% per annum for the third year on $1 million. (FRA is for the year starting at year 2 and ending at year 3).

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