Assume your company needs to borrow 10,000,000 in three months that you will be able to pay back nine months later. In order to hedge against a rise in interest rates in three months, the company enters into an (312) FRA with a bank at 4% FRA rate, with a notional principal of 10,000,000.

a) If in 3 months, the interest rate drops to 3%, who will pay the compensation? 2 points

b) What will be the amount paid for this compensation? 2 points