On 1 January, a company borrowed USD 5,000,000 at Citibank for six months at 7% p.a. to fund an investment project. But due to sudden changes in the market condition, the company has decided to defer the investment. The finance officer then deposited the USD 5,000,000 for three months at 6.75% p.a. on the same day. The CFO wants to hedge the mismatch position as he worries about the investment environment after March. He asks Citibank for the following FRA quotes:

	Bid	Ask
3 x 6 FRA	7.10% p.a.	7.15% p.a.
6 x 9 FRA	7.20% p.a.	7.25% p.a.

(a) Should the CFO buy or sell an FRA? (2 marks)

(b) Which FRA should the company take? (2 marks) And at what rate? (1 mark)

(c) For a complete hedge, what amount should the company deal? (2 marks)

On 1 April, the 3-month interest rate is 6.90% p.a.

(d) What is the settlement amount of the FRA contract? (4 marks) Who pays whom? (1 mark)

(e) What is the overall profit or loss at the end of six months? ( 6 marks)