A corporate treasurer wishes to hedge against an increase in future borrowing costs due to a possible rise in short-term interest rates. She proposes to hedge against this risk by entering into a long 3 12 FRA. The current term structure for LIBOR is as follows:

Term (Days) Interest Rate (%)

30 5.1

90 5.25

180 5.7

360 5.95

Calculate the rate the treasurer would receive on a 3 12 FRA.

Suppose the treasurer went long this FRA. Now, 45 days later, interest rates have risen and the LIBOR term structure is as follows:

Term (Days) Interest Rate (%)

45 5.15

315 6.15

Calculate the market value of this FRA based on a notional principal of $10,000,000.

At expiration, the 180-day Libor is 6.25 percent. Calculate the payoff on the FRA. Does the treasurer receive a payment or make a payment to the dealer?