On March 15th, a bank buys a 3×6 FRA on a notional principal of $100 million at the agreed forward interest rate of 4.7%. Two months later on May 15th, because of a change in circumstances, the bank has to neutralize this long FRA.

a. Explain how the long 3×6 FRA negotiated on March 15th can be neutralized on May 15th.

b. On May 15th, the following spot interest rates are recorded:

Maturity Rate:

1 months 3.8%

2 months 4.0%

3 months 4.2%

4 months 4.4%

5 months 4.6%

Determine how much the bank gains (losses) by neutralizing the FRA on May 15th. Make clear any assumptions that are made in your evaluation.