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UltraPower Utilities Inc. has just entered into a forward rate agreement FRA with CIBC

UltraPower Utilities Inc. has just entered into a forward rate agreement (FRA) with CIBC whereby the latter agreed to lend $250 million to the former for a two-year period, effective nine months from now. Currently, we observe the following spot rates: Horizon 0.75 1.00 1.50 2.00 2.50 2.75 Rate 2.250% 2.358% 2.400% 2.550% 2.700% 2.852% all continuously compounded in annual terms. a) What is the fair contract rate? b) Supposing that after six months, the new term structure is the following: Horizon 0.25 0.50 0.75 1.00 1.50 2.00 2.25 Rate 2.255% 2.320% 2.380% 2.450% 2.600% 2.750% 2.955% all continuously compounded in annual terms. What will be the contract value to UltraPower Utilities at that point? Please keep four decimal place in the percentage numbers, e.g., 2.7568%.

Jan 31 2020 View more View Less

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