Nestle rolls over a $25 million loan priced at LIBOR3 on a three-month basis. The company feels that interest rates are rising and that rates will be higher at the next roll over date in three months. Suppose the current LIBOR3 is 5.4375%.

a. Explain how Nestle can use an FRA at 6% from Credit Suisse to reduce its interest rate risk on this loan.

b. In three months, interest rates have risen to 6.25%. How much will Nestle receive/pay on its FRA? What will be Nestle's hedged interest expense for the upcoming three-month period?

c. After three months, interest rates have fallen to 5.25%.  How much will Nestle receive/pay on its FRA?  What will be Nestle’s hedged interest expense for the next three-month period?