Reddit

### Q-160.4. Assume the one-year spot (zero) interest rates is 2.8% and the fifteen month (1.25 years) zero rate is 3.4%, with continuous compounding. If we want to initiate a new forward rate agreement (FRA), what is the appropriate fixed FRA rate, expressed with quarterly compounding? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

Correct answer: C — 5.84%

At initiation, the FRA is priced so that its value is zero. Therefore, the fixed FRA rate must equal the forward rate.

Compute the forward rate with continuous compounding:

f(1.0,1.25) = \frac{3.4\% \times 1.25 - 2.8\%}{0.25} = 5.8\%

Convert to quarterly compounding:

R_f = 4\left(e^{5.8\%/4} - 1\right) = 5.842\%

So the appropriate fixed FRA rate is 5.84%.

Comments (0)

No comments yet.