Please help me with question 6 part (b) (c) and (d). Hints:Think of the FRA as t
ID: 2695316 • Letter: P
Question
Please help me with question 6 part (b) (c) and (d).
Hints:Think of the FRA as two parts:
Fixed: Payoff at 0.5 = 0.3% x 1000000 x 0.25
Floating: Payoff at 0.5 = -r(0.25,0.5) x 1000000 x 0.25
Your portfolio will replicate both parts.
Fixed part: This is straightforward, as P(0,0.5) has payoff of $100 at 0.5 then simply purchase/go long (0.3% x 1000000 x 0.25)/100 of P(0,0.5) to replicate this payoff.
Floating part: P(0,0.25) will have value $100 at 0.25 which will grow to $100(1+0.25r(0.25,0.5)) by 0.5. So selling/going short (1000000)/100 of P(0,0.25) will be worth:
-1000000(1+r(0.25,0.5)0.25)= -r(0.25,0.5) x 1000000 x 0.25
Explanation / Answer
Use interest rate for every particular period of time ....... selling/going short (1000000)/100 of P(0,0.25) will be worth: -1000000(1+r(0.25,0.5)0.25)= -r(0.25,0.5) x 1000000 x 0.25