University of Kansas

Use the risk-free rates in Problem 4.14 to value an FRA where you will pay 5% for the third year and receive LIBOR on $1 million. The forward LIBOR rate (annually compounded) for the third year is 5.5%. The 3-year risk-free interest rate is 3.7% with continuous compounding. From equation (4.10), the value of the FRA is therefore . or $4,474.69. ................
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