Problem 3: Suppose that you know that in 3 months (December 11th) your client is going to pay you1,000,000, which you wont need until 1 year later, thus you are thinking about investing your money during that 1-year-period of time. In order to hedge against the risk that interest rates may change, you decide to enter into a FRA with Bank X at 2% FRA rate.

1. a)What is the value of the FRA one month after the agreement if the forward rate for the FRAs period of time turns out to be 2,5% and the 2 months spot rate stands at 1,5%?
2. b)What is the final payoff if in 3 months the one year spot interest rate quotes at 1,8%?