A financial manager needed to hedge against an unexpectedly large increase in short-term interest rates. She decided to hedge this risk exposure by going long on a forward rate agreement (FRA) that expired in 180 days and was based on 90-day LIBOR. The term structure for LIBOR at the time was as follows:

TermInterest Rate

90 days1.15%

180 days1.40%

270 days1.60%

360 days1.75%

Based on no-arbitrage principles, the fixed rate the manager would have paid on the FRA is closest to:

A. 1.60%

B. 1.99%

C. 2.09%

D. 2.34%