Forward Rate Agreement (FRA) (2/10) Suppose you need to pay $1M to nance a project in 3 months. Bank ABC will provide a one year loan with the amount of $1M in 3 months and bank XYZ oers a 3mth15mth FRA with notional value of $1M and forward rate r0, 3mth, 15mth = 10% (simple interest rate).

(i) What should you do to hedge your borrowing cost?

(ii) Suppose the one year simple interest rate in 3 months rises to 12%. How much money

do you owe Bank ABC in 15 months? When and how much money will you pay/receive

from bank XYZ? What are your actual cost of borrowing?

(iii) Redo part (ii) assuming the one year simple interest rate drops to 5% in 3 months.