Francis enters into an FRA with the local bank. The current one year forward rate is 4%. If the yield on a one year T-Bill in one year is 3.5%, what payment will be made to settle the agreement?

Question 13 options:

a) Matthew would pay the bank 0.5%

b) Matthew will use the market rate rather than the FRA rate

c) The bank would pay Matthew 0.5%

d) Matthew would not exercise his option