It is now mid-March. Compact Ltd (the firm hereafter) signs an agreement to invest in a wealth management product (WMP) with a purchase price of 20 million in three months. The WMP is a 6-month floating-rate money market instrument. The interest of the WMP is determined by the 6-month LIBOR rate when the agreement starts. Upon expiration (i.e., in mid-December), the WMP makes a lump sum payment to its buyer, which includes both the principal amount (i.e., 20 million) and the interest income. There is NO interim cash flows from the WMP before the expiration date. Right after signing the purchase agreement, the firm starts to worry about the future interest rates. Note the firm's operational expenses are fixed over time: An increase (decrease) in market interest rate will NOT lead to an increase (decrease) in its expenses. However, the treasurer of the firm is concerned about the unexpected interest rate movement that might decrease the firm's revenue (i.e., lower interest income), and proposes to the CEO to hedge the interest rate risk by using the FRA contract(s). Suppose the following FRAs are available in the market in mid-March. The principal amount is $20 million for all the FRAs. All FRAs are the standard US FRAs (NOT the Australasian ones). The rates quoted in the table above are simple rates. The FRAs follows the standard US settlement terms (NOT the Australasian terms). Required: (a). To fully hedge the interest rate risk for the firm, determine which FRA is the most appropriate to use? Also state if you should short (sell) or long (buy) the FRA contract. (b). Suppose that the firm fully hedges the interest rate risk using the most appropriate FRA contract. Using calculations to explain whether the firm makes a gain or loss in the FRA contract, if the 6-month LIBOR rate is 4% per annum in midJune. Note: Ignore the day count convention, and always assume that one-, two-, three-, ..., month corresponds to 1/12,2/12,3/12,, of a year (i.e., 1/12, 2/12, 3/12, .. of 365 days) when using the LIBOR rates and FRA rates in calculating the settlement amount. (6 marks)