A company entered some time ago into a FRA (forward rate agreement) contract. Through...
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A company entered some time ago into a FRA (forward rate agreement) contract. Through this agreement the company will receive a fixed 4% on a principal of $100 million for a 3-month period starting in three years from now in exchange for 3-month LIBOR. If in three years, the forward 3-month LIBOR rate proves to be 4.5%, calculate: (i) the settlement amount (cash flow) that has to be exchanged in arrears (ii) the settlement amount (cash flow) that has to be exchanged at initiation. (iii) If the 3.25 year spot rate is 5%, what is the value of the FRA contract for the company today? (use continuous compounding in all your calculations)
A company entered some time ago into a FRA (forward rate agreement) contract.
Through this agreement the company will receive a fixed 4% on a principal of $100 million for a 3-month period starting in three years from now in exchange for 3-month LIBOR.
If in three years, the forward 3-month LIBOR rate proves to be 4.5%, calculate:
(i) the settlement amount (cash flow) that has to be exchanged in arrears
(ii) the settlement amount (cash flow) that has to be exchanged at initiation.
(iii) If the 3.25 year spot rate is 5%, what is the value of the FRA contract for the company today? (use continuous compounding in all your calculations)
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