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Solution Library
Calculation Of Value Of Forward Rate Agreement
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 $1000x%/2 coupon payments every 6 months
** x% quarterly coupon means $1000x%/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 it discusses about calculation of value of a Forward Rate Agreement with the details given.
Total Word Count 27
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