How would you use FRAs to accomplish the goals of the following situations? State whether the entity buys (agrees to borrow) or sells (agrees to lend), which FRA (i.e., the settlement date and the term of the loan in the FRA) and the size.

1. A bank has $50 million in loans it has made to other banks which pay 3-month LIBOR and mature in three months. It expects to roll them over (re-lend for another three months). The bank issued deposits, for which it pays (a little less than) LIBOR, to fund these interbank loans. $40 million of these deposits mature in three months, which the bank will need to roll over, the rest in six months.

What is the banks interest rate Gap in three months and how can it hedge that risk?