A bank made a 3-month $100 million loan at 6% funded by a 6-month deposit at 2%.To protect against interest rates when rolling over the loan in three months, the bank decides to hedge using a forward rate agreement

1. Explain clearly how the bank can hedge to maintain the current spread against interest rate risk using FRAs.

Show the net 3-month spread in dollars earned by the bank after it hedges using FRAs. Explain the results.