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**Question 37** The six-month SOFR rate is 2.65%, and the one-year SOFR rate is 2.90%. Both rates are continuously compounded. An investor enters into a forward rate agreement (FRA) to receive 4.25% with quarterly compounding. The notional principal is $25 million. What is the payoff of this FRA? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

R_{\text{Forward}} = 0.0290 + (0.0290 - 0.0265) \times \frac{0.5}{(1 - 0.5)} = 0.0315 = 3.15\%

R_{\text{Forward, Quarterly}} = 4 \times \left(e^{\frac{0.0315}{4}} - 1\right) = 0.0316 = 3.16\%

\text{payoff} = \`$25`{,}000{,}000 \times (0.0425 - 0.0316) \times (1.0 - 0.50) = \`$136`{,}250

(Book 3, Module 42.2, LO 42.j)

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Question 37

The six-month SOFR rate is 2.65%, and the one-year SOFR rate is 2.90%. Both rates are continuously compounded. An investor enters into a forward rate agreement (FRA) to receive 4.25% with quarterly compounding. The notional principal is `$25` million. What is the payoff of this FRA?

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Financial Risk Manager Part 1

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Question 37 The six-month SOFR rate is 2.65%, and the one-year SOFR rate is 2.90%. Both rates are continuously compounded. An investor enters into a forward rate agreement (FRA) to receive 4.25% with quarterly compounding. The notional principal is $25 million. What is the payoff of this FRA?

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Question 37

The six-month SOFR rate is 2.65%, and the one-year SOFR rate is 2.90%. Both rates are continuously compounded. An investor enters into a forward rate agreement (FRA) to receive 4.25% with quarterly compounding. The notional principal is `$25` million. What is the payoff of this FRA?