We discussed an example of Forward Rate Agreement in class. Recall the setting: now (t), two parties, call them A and B, agree to exchange cash flows on a future date t2 > t. On t1 (t < t1 < t2), the spot rate prevailing from t1 to t2 will be observed, denote it by s(t1,t2). On t2, A passes $e^s(t1,t2)(t2t1) to B, and B passes e^f(t2t1) to A. The rate f is agreed now (t). Weve shown that if A enters the FRA without cost (i.e. the price charged on A to enter the FRA is 0), f should be set at the forward rate f(t,t1,t2).

1. Now show the counter part: if it costs B $0 to enter the FRA, the f should still be set at f(t, t1, t2).

2. Now, suppose f > f(t,t1,t2), compute the price for A to enter the FRA.