Financial Risk Manager Part 1

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Explanation:

Correct answer: B — -`$2`,570

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\%

R_f = 4\left(e^{8.0\%/4} - 1\right) = 8.0805\%

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.

Explanation:

Correct answer: B — -`$2`,570

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\%

R_f = 4\left(e^{8.0\%/4} - 1\right) = 8.0805\%

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.

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MManit

Last updated: April 18, 2026 at 11:32

-`$2`,701

41.7%

-`$2`,570

41.7%

+`$2`,570

8.3%

+`$2`,701

8.3%