Five-to-eight-month forward rate agreement with firm

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Reference no: EM131832170

You enter into a five-to-eight-month forward rate agreement with a firm. You agree to lend the firm a 3-month loan of $5 million starting 5 months from now, with a quarterly compounded forward interest rate of 2.5% per annum. Currently, the continuously compounded 5-month and 8-month interest rates are 3% per annum and 3.5% per annum, respectively.

1) What is the implied forward rate for the 3-month period starting 5 months from now?

2) What is the present value of this forward rate agreement to you now?

Reference no: EM131832170

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