Financial Market product

mayankmundhra30
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Joined: Sat Jun 25, 2016 8:13 am

Financial Market product

Postby mayankmundhra30 » Thu Aug 25, 2016 6:58 pm

Suppose 3 months and 6 months LIBOR spot rates are 5% and 6%. An investor enters into a FRA in which he will receive 9% on a principle of $8,000,000 between 3 and 6 months. What is the value of a FRA?
Choose one answer.
a. $140,000 Incorrect
b. $560,000 Incorrect
c. $135,862.37 Incorrect
d. $38,817.82 Correct
The correct answer is D
3 months forward rate after 3 months is: 0.06+(0.06-0.05)(1/2-1)= 0.07
Value of the FRA = $8,000,000 * (0.09-0.07) * (0.25) * e^(-0.05*0.5)

In the above problem could you please explain the denominator part? Why 0.5 is there in the denominator. Shouldn't it be 0.25. Is it a 3X6 FRA??

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