Based on your answers to the previous two questions and a comparison of the prices of the cap and floor, what can you say about the forward rate between one and two years?
A) The forward rate is roughly equal to the strike rate of the cap and floor.
B) The forward rate is such that the mark-to-market value of the FRA at the strike rate of the cap and floor will be zero.
C) Both (a) and (b).
D) There is not enough information to say anything about the forward rate.

Question

Based on your answers to the previous two questions and a comparison of the prices of the cap and floor, what can you say about the forward rate between one and two years?
A) The forward rate is roughly equal to the strike rate of the cap and floor. 
B) The forward rate is such that the mark-to-market value of the FRA at the strike rate of the cap and floor will be zero.
C) Both (a) and (b).
D) There is not enough information to say anything about the forward rate.

Quizplus · Accepted Answer

Both statements A and B describe conditions that are typically true when the forward rate is at the level where the cap and floor prices would imply it to be. The forward rate being roughly equal to the strike rate of the cap and floor suggests that the market expects the future interest rate to be around that level. Additionally, the mark-to-market value of a forward rate agreement (FRA) being zero at the strike rate indicates that the forward rate is considered fair and balanced, aligning with the expectations embedded in the prices of the cap and floor.

Based on Your Answers to the Previous Two Questions and a Comparison