Explanation:
First, calculate the forward rate:
With quarterly compounding:
Finally, calculate the payoff of the FRA:
\text{Payoff} = \`$2`,500,000 \times (0.013 - 0.011) \times (0.50 - 0.25) = \`$1`,250(Book 3, Module 42.2, LO 42.i)
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Question 29
The 3-month and 6-month market reference rates are 0.5% and 0.8%, respectively (assume continuous compounding). An investor enters into a forward rate agreement (FRA) in which he will receive 1.3% (assuming quarterly compounding) on a principal of $2,500,000 between months 3 and 6. What is the payoff of the FRA?
A
$1,250.
B
$4,950.
C
$6,875.
D
$7,450.
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