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Unformatted text preview: The forward rate of interest for three months beginning in 1 year is 9.102%. The zero interest rate for 15 months is 8.6% with continuous compounding. The principal is $1,000,000 and the forward interest rates are expressed with quarterly compounding. 5 FRA Example Continued • This FRA has positive value because, according to the agreement, the holder earns a rate that is higher than the current forward rate. • VFRA= 1,000,000(.25)(.095.09102)e0.086*1.25 = $893.59 6 Theories of the Term Structure Page 93 • Expectations Theory: forward rates equal expected future zero rates • Market Segmentation: short, medium and long rates determined independently of each other • Liquidity Preference Theory: forward rates higher than expected future zero rates 7...
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 Spring '12
 LucyAckert
 Interest Rates, Monetary Policy, Interest, Interest Rate, forward rate agreement

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