QUESTION 6B. OFF-BALANCE-SHEET BUSINESS (9 MARKS) A large proportion of Delta Bank's security portfolio, which is worth $2 million in market values, is maturing in three months' time. The bank plans to re- invest the proceeds in 180-day commercial papers. The bank's managers are concerned that market interest rates are falling. (i) Should Delta Bank buy or sell Forward Rate Agreements (FRAS) to hedge this risk and why? (2 marks) (ii) Assume Delta Bank enters into a 180-day FRA contract (FRA rate = 10%) to hedge its interest rate risk. On the settlement day, the reference (floating) rate has risen to 11%. Will Delta Bank gain or lose on this FRA? Calculate the compensation payment in dollar terms (show all workings). (4 marks) (iii) Explain whether or not Delta Bank has successfully hedged its interest rate risk with the FRA contract