3. On 10 January, your company decide to borrow by issuing promissory notes with a face value of RM1 million that mature in 90 days from the date of issue. The promissory notes will be issued in one months time. Due to the interest rate may increase, you decide to hedge the interest rate by buying FRA instrument. The current quote of FRA is 6.9%. On the settlement date, the floating market rate fixes at 7.4%.

You are required to:

Quote the FRA by A x B type.

(2 marks)

Specify the key dates of your FRA by drawing the trading timeline.

(5 marks)

Compute the total amount of interest payment.

(7 marks)

Calculate the effective annual cost of borrowing (assume 365-day calendar year).

(2 marks)

(Total: 16 marks)

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