Answer: -\$2,570

**Correct answer: B — -\$2,570** 1. Compute the forward rate between 1.0 and 1.25 years using continuous compounding: \[ f(1.0,1.25) = \frac{4.0\% \times 1.25 - 3.0\%}{0.25} = 8.0\% \] 2. Convert this to quarterly compounding: \[ R_f = 4\left(e^{8.0\%/4} - 1\right) = 8.0805\% \] 3. The holder earns 7.0%, which is below the forward rate, so the FRA has negative value: \[ V = \left[1{,}000{,}000 \times 0.25 \times (7.0\% - 8.0805\%)\right] e^{-4.0\% \times 1.25} \approx -2{,}570 \] Thus, the FRA value is **-\$2,570**.

Author: Manit Arora