Description of this paper

You enter into a five-to-eight-month forward rate agreement with a firm.

Description

solution


Question

You enter into a five-to-eight-month forward rate agreement with a firm. You agree;to lend the firm a 3-month loan of $5 million starting 5 months from now, with a;quarterly compounded forward interest rate of 2.5% per annum. Currently, the;continuously compounded 5-month and 8-month interest rates are 3% per annum and;3.5% per annum, respectively.;1) What is the implied forward rate for the 3-month period starting 5 months from;now?;2) What is the present value of this forward rate agreement to you now?

 

Paper#30423 | Written in 18-Jul-2015

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