Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities

Question 1

What is a “Discount Factor”?

Answer 1

The price equivalent of a zero-rate.

Also may be stated as the present value of a currency unit on a future date.

Question 2

What is the “Implied Forward Rate”?

Answer 2

The breakeven reinvestment rate linking a short-dated and long-dated zero coupon bond.

Question 3

What is a “Forward Rate Agreement”?

Answer 3

An OTC derivative contract in which counterparties agree to apply a specific interest rate to a future time period.