ABC company has a $10 million loan maturing in 3 months that it plans to roll over for a further six months. The company treasurer feels that interest rates will be higher in three months when rolling over the loan. Suppose the current 6-month LIBOR rate is 1.9%.

a)Explain how ABC company can use an FRA at 2% from Banque Paribas to lock in a guaranteed six-month rate when it rolls over its loan in three months (e.g. buy/sell an FRA, underlying principle, what rate will apply and when).

b)In three months, 6-month LIBOR turned out to be 1.75%. How much will ABC company receive/pay on its FRA?