You are a dealer. You are given a deposit of EUR 7 million at 4.9% for 9 months (273 days). You also lend EUR 7 million at 4.9% for 3 months (92 days). You cover the mismatch with a 3v9 FRA, quoted to, you as 4.80/4.85%.

a. Do you buy or sell the FRA?

b. At what price do you deal?

c. What notional principal amount do you deal for the FRA, assuming that you wish to match your exposure as closely as possible and that you can deal exactly the right amount?

d. When the time comes to settle the FRA, the 6-month interest rate is 4.95%/5.05%. What is the settlement amount on the FRA, and who pays whom?

e. You always borrow at LIBOR and lend at LIBID. What is your overall cash profit or loss in euros at the end of nine months?