Answer: 5.84%

**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. 1. Compute the forward rate with continuous compounding: \[ f(1.0,1.25) = \frac{3.4\% \times 1.25 - 2.8\%}{0.25} = 5.8\% \] 2. 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%**.

Author: Manit Arora