Hello,

For an exercise, I am asked to compare the fixed leg payment "K" in two FRA products.

1). The first FRA is a regular product, where the floating leg (i.e. 3 month libor) is set in one years time, and paid at time 1 year + 3 months. Fixed Leg "K" is set today.

2). The second FRA is of libor in arrears form, where the floating leg is both set and paid at one years time. Fixed Leg "K" is set today.

I am asked how does the fixed leg "K" compare in these two FRA products.

I think that the fixed payment "K" in the libor in arrears FRA should be higher than the regular FRA product. The reason is because the libor in arrears payment has higher value today than the regular libor payment. Thus, we need a higher K in order for the two legs to net out to zero.

Am I correct?

Many Thanks