A bank made a 6-month $100 million loan at 6% funded by a 3-month deposit at 3%.To protect against interest rates when rolling over the deposit 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.
2. Show the net 3-month spread in dollars earned by the bank after it hedges using FRAs. Assume interest rates changes +/- 2%. Use 91 days for 3-month FRAs. Explain the results.