Question 11:

You plan to borrow $1m in 3-months for a 6-month period. The rate you will be charged for this loan is 6-m LIBOR (currently 2.5% per annum) plus a fixed mark-up of 300 bps with interest to be paid at the end of the loan period. You expect LIBOR to rise over the following three months. You hedge against the interest rate risk by buying a FRA (forward rate agreement) which locks in a rate in three months time for six months at 6% per annum. Three months later the 6-m LIBOR increases to 4% per annum. Hence under the FRA you expect to receive from your counterparty at settlement date (i.e. 3-months from now) compensation for the extra interest payable on this loan of about:

a. $1,961 b. $2,470 c. $3,044 d. $4,831 e. $7,229