December 2025
Intermediate to advanced
561 pages
27h 17m
English
book
International Financial Management: An Analytical Framework, 2nd Edition by Pearson
by Thummuluri Siddaiah
Content preview from International Financial Management: An Analytical Framework, 2nd Edition by Pearson
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INTEREST RATE FUTURES 317
at today’s two-year deposit rate. In other words, the forward interest rate eliminates any
arbitrage profit arising out of the difference between spot interest rates and forward interest
rates. Thus, (1 +
0
K
1
)
1
(1 +
1
K
2
)
1
= (1 +
0
K
2
)
2
(1+ 0.08) (1 + 0.1204) = (1 + 0.10)
2
To generalize,
(1 +
0
K
t
)
t
(1 +
t
K
T
)
T−1
= (1 +
0
K
T
)
T
where
K = Interest rate
t = Time period (t < T)
A Forward Rate Agreement (FRA) is a contract for locking-in future short-term inter-
est rates. To elaborate, FRA is a contract between two parties to the effect that the seller
pays the buyer, at a specified time point in the future, ...
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