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Calculating Forward Rate Agreements

Question

On the 15th of May 2013 you enter a Forward  Rate Agreement (FRA)  to borrow on the 15th of September 2013 $1’000’000 for 8 months at a fixed annualized interest rate of 5% (for a FRA  with a contract length of 8 months the compounding  frequency  is 1.5 times c.p.a.). Suppose the following bonds are traded in the market on the 15th of August 2013:

•    1-month zero coupon with $1000 face value currently trades for $996.672
•    3-month zero coupon bond with $1000 face value currently trades for $989.555
•    1-year 10% semi-annual coupon bond with $1000 face value currently trades for $1051.706    
•    1-year 16% quarterly coupon bond with $1000 face value currently trades for $1110.628     
•    1-year 4% quarterly coupon bond with $1000 face value currently trades for $993.938     

x% semi-annual coupon means $1000 x%/2 coupon payments every 6 months
x% quarterly coupon means $1000 x%/4 coupon payments every 3 months
What is the value of the FRA for you as a borrower on the 15th of August 2013?

Summary

The question belongs to Finance and the question is about calculation of forward rate agreements. The question is about borrowing on forwards can help in the calculation of forward rate agreement with certain percentage of interest.

Total Word Count 27

 

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