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Suppose that a party wanted to enter an FRA that expires in 42 days and is...

Suppose that a party wanted to enter an FRA that expires in 42 days and is based on 123-day LIBOR. The dealer quotes a rate of 0.0437 on the FRA. Assume that at expiration, the 123-day LIBOR is 0.0229, and the notional amount is USD15,000,000. What is the payoff of the FRA LONG position?

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Expert Solution

Forward Rate Agreement –

Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed upon date in the future. An FRA is an agreement to exchange an interest rate commitment on a notional amount.

The FRA determines the rates to be used along with the termination date and notional value. FRAs are cash-settled with the payment based on the net difference between the interest rate of the contract and the floating rate in the market called the reference rate. The notional amount is not exchanged, but rather a cash amount based on the rate differentials and the notional value of the contract.

jeff jeffy answered 2 years ago
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