The 6-month, 12-month, 18-month, and 24-month zero rates are 3.00%, 3.50%, 4.00%, and
4.50% with semi-annual compounding.
Q I: What are the rates with continuous compounding?
Q2: What is the forward rate for the six-month period beginning in 12 months (i.e., F12.1 8)?
Q3: What is the value of an FRA that promises to pay you 5.50% (compounded semi-annually) on a principal of $1 million for the six-month period starting in 12 months? Hints: you must convert your continuous rate calculated in Q2 to semi-annual to determine the current forward rate for the FRA; you must remember that the contract covers only 6 months (one-half year) of interest. See pages 90-93.© BrainMass Inc. brainmass.com October 10, 2019, 4:11 am ad1c9bdddf
Find attached solutions to your questions.
The equation required for solving question 1 is given as:
Rc = m*ln(1 + Rm/m)
Rc = continuous compounding rate; Rm = equivalent rate with compounding m times per annum.
Note: You can see this equation in the following book "Options, Futures, and other Derivatives - 7th Edition by John C. Hull". It is given as equation 4.3 in the book.
For our question, m = 2 (semi-annual ...
This solution helps answer questions regarding continuous compounding, forward rate and value of FRA.