Reference no: EM132688917

Suppose that the one- and two-year zero-coupon bond rates are 3.1% and 3.3%, respectively.

i. Determine the rate on a 12x24 forward rate agreement (FRA) (12x24 means settlement is a year from now for delivery of the 1-year LIBOR at that date).

ii. A firm bought the above 12x24 FRA on $100 million notional principal and wishes to understand what would occur if at the settlement date (which is one year from the date of purchase of the FRA) one-year LIBOR turns out to be 3%.

Using your same answer in (i), calculate the direction and amount of the settlement cashflows. Explain your answers

b) Determine the rate on a 6x9 FRA if the current 6-month LIBOR rate is 2.10% and the 9- month LIBOR rate is 2.65%.

Use a day count of 182 for the 6-month period and of 91 for the three-month period after that.

c) Determine the rate on a 6x12 FRA if the current 6-month LIBOR rate is 1.65% and the 12- month LIBOR rate is 1.8%. Use a day count of 182 for the 6-month period and 364 days for the 12 months.