A financial institution sells a 36 FRA on a notional amount of $5m. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is 5.5 percent. There are actually 92 days in the three-month FRA period. Assume that three months from today the settlement rate is 4 7/8 percent. Determine how much the FRA is worth and who pays whom the buyer pays the seller or the seller pays the buyer.

Select one:

a. The buyer pays $4,732

b. The seller pays $5,278

c. The seller pays $7,624

d. The buyer pays $7,887