Company XYZ enters into an FRA with Company ABC in which Company XYZ will receive a fixed rate of 5% on a principal amount of $5 million for 3 months starting in one year. In return, Company ABC will receive the one-year LIBOR rate on the principal amount. The agreement will be settled in cash in a payment made at the beginning of the forward period, discounted by an amount calculated using the contract rate and the contract period.

Assume the following data:

The forward rate for the period (FRA) = 3.5%

Suppose the LIBOR rate (with quarterly compounding) = 4%

What will be the payoff to the Company ABC?

Select one:

a.

The payoff is $6250

b.

The payoff is $5m

c.

The payoff is $6188 at the 1.25 year point

d.

The payoff is $6188

e.

The payoff is - $6250