Assume TwinCorp knows that 3 months later it will need to borrow 7,000,000 for 4 months. TwinCorp signs an FRA agreement with a bank dealer which commences in 3 months. The FRA rate is 3.8 %. Assume the 2-month LIBOR reference rate in four months is realised as 4.2%.

a) Calculate the amount of FRA compensation and show who pays whom. (15 Marks)

b) Show that the net cost of borrowing for TwinCorp on annual basis is equal to the FRA. rate. (10 Marks)

c) What difference will there be as regards the FRA if TwinCorp does not borrow?

Explain your answer. (10 Marks)

d) Explain the difference between FRA and Forward Forward Agreement. (15 Marks)

Assume that each month consists of 30 days while a year is 365 days.