A forward rate agreement for $3,000,000 was entered into a month ago for a three

Question

A forward rate agreement for $3,000,000 was entered into a month ago for a three months period of time that will begin nine months from today. Current zero rates are provided in the table below. Use that information to find the value of the FRA to Counterparty A that has agreed to pay 8.8% annually (expressed with continuous compounding).

Term (months)

Zero Rate

(continuously compounded)

3

5.1%

6

6.2%

9

7.3%

12

8.4%

15

9.3%

Term (months)

Zero Rate

(continuously compounded)

3

5.1%

6

6.2%

9

7.3%

12

8.4%

15

9.3%

Explanation / Answer

FRA payment = (((R - FRA) x NP x P) / Y) x (1 / (1 + R x (P / Y)))

(((0.088-0.084)*3000000*90)/360*(1/(1+0.088*(90/360)))

= $11029.41

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