• You will be taking out a 3-month loan of 200,000 in 5 months' time. You wish to hedge against changes in the interest rate by entering an FRA. The 5-month libor rate is 4% and the 8-month libor rate is 5%. There are 151 days in the first 5-month period, and 92 days in the subsequent 3-month period.
• (a) What is the price of the FRA?
• (b) What is the present value of the FRA at inception?
• (c) Assume that 2 months (59 days) have elpased and the 3-month and 6-month Libor rates are, respectively, 3% and 4%. What is the current value of the FRA?
• (d) The bank with which you have set up the FRA allows you to exit your position by entering into an opposite FRA. Based on your answer to part (c), discuss wether or not you would want to exit the FRA.

Answer rating: 100% (QA)

a To calculate the price of the FRA we need to determine the difference between the agreedupon fixed rate and the forward rate based on the prevailing ... View the full answer