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Computation of forward rate agreements

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Reference no: EM13828146

Problem:

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?

Additional Information:

This question is from Finance and the question is about computation of forward rate agreements. The question is about borrowing upon forwards can help in the computation of forward rate agreement with certain percentage of interest.

Reference no: EM13828146

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