Suppose you need to pay $1M to finance a project in 3 months. Bank ABC will provide a one year loan of $1M in 3 months and bank XYZ offers a 3mth15mth FRA with notional value of $1M and forward rate r0, 3mth, 15mth = 10% (simple interest rate).

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

(2) Suppose that 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 is your actual cost of borrowing?

(3) Suppose that the one year simple interest rate in 3 months drops to 5%. How much money do you owe Bank ABC in 15 months? When and how much money will you pay/receive from bank XYZ? What is your actual cost of borrowing?