Consider an Australian dollar FRA where a company will receive a rate of 6% with annual compounding, on a principal of $100 million over 1 year. The forward rate is 5%. With this information and following the Australian FRA conventions,

a. Explain whether an investor seeking to hedge a 1 year future investment would enter into the receive or pay side of the FRA.

b. Following from part a. show that the investor who hedges their future investment with the FRA would earn the FRA rate on their future investment.