Valuation of Forward Rate Agreement

Consider a financial institution that has entered into a forward rate agreement (FRA) to borrow $10 million at a fixed rate of 3% for a one-year period starting in six months. The current yield curve suggests that the six-month LIBOR rate is 2.5%, and the expected LIBOR rate for the period of the agreement is expected to be 4%.

Determine the fair value of the FRA at the time of the agreement, considering the present value of the cash flows expected to be exchanged under the forward contract.