In June 2010, a bank will issue a 6/9 FRA referenced to BBSW with a guaranteed rate of 4.5% p.a.. Bank bill futures for December 2010 delivery are priced at 95.25.Assume there are no transaction costs and no spread between FRA borrowing and lending rates, and 30-day months.

a) Identify a strategy based on one futures contract which will yield an arbitrage profit, and

b) If the 90-day bank bill rate turns out to be 6.0% in December 2010, calculate the gain or loss on:

i) the futures position

ii) the FRA position

iii) overall. [Note any assumptions you consider necessary.]