Problem
Use the following LIBOR-zero rates to find an appropriate forward rates:
|
period (years)
|
LIBOR-zero (cont.comp)
|
forward rate for the nth year (cont.comp)
|
|
0.5
|
4.04%
|
|
|
1
|
3.05%
|
?
|
|
1.5
|
3.50%
|
?
|
Task
i. Find the forward rate for year 1st year and for the 1.5th year , respectively.
ii. Find the value of the FRA where you will receive 9% (with semi-annual compounding) on a principal of $100 million for 6 months, which the FRA term starts in year 1 and end in year 1.5. *hint: you would need to convert the appropriate forward rate with continuous compounding from question #1 into a semi-annual compounding rate first.
iii. 1 year later, if the 6 month LIBOR turns out to be 5% with semi-annual compounding, how much do you need to pay or receive at 1year point?