Which equation is used to calculate FRA rates?

The correct equation used to calculate Forward Rate Agreement (FRA) rates is based on the methodology of determining the interest rate that will apply for a future period. Option A presents the equation that effectively calculates the FRA rates by taking into account both the current rates and the notional principal associated with both periods involved in the agreement.

In the context of FRAs, the essential components of the equation include the following:

• ( r2 ) and ( r1 ) are the prevailing interest rates for the two different periods.

• ( n2 ) and ( n1 ) represent the number of periods for which these rates apply.

• ( Nfra ) refers to the notional amount for the FRA.

• The term ( (1 + (r1 * n1/365)) ) reflects the adjustment for the time value of money, accounting for the days in a year typically used in financial calculations.

This equation allows for the determination of the future rate that would need to be swapped to make the cash flows from the FRA equal to what would occur without the FRA, effectively ensuring that the interest payments are accurately considered based on the different time periods involved.

The other equations presented do not adhere to the necessary formulation for deriving FRA rates