1. Ford has a $20 million Eurodollar deposit maturing in two months that it plans to roll over for a further six months. The company's treasurer feels that interest rates will be lower in two months time when rolling over the deposit. Suppose the current LIBOR 6 month rate is 7.875%.

a. Explain how Ford can use an forward rate agreement (FRA) at 7.65% from Banque Paribas to lock in a guaranteed six-month deposit rate when it rolls over its deposit in two months.

b. After two months, LIBOR 6 month rate has fallen to 7.5%. How much will Ford receive/pay on its FRA? What will be Ford's hedged deposit rate for the next six-month period?

c. In two months, the LIBOR 6 month rate has risen to 8%. How much will Ford receive/pay on its FRA? What will be Ford's hedged deposit rate for the next six months?