Title

Assume TwinCorp knows that $3$ months later it will need to borrow $7,000,000$ for $4...$

Description

Assume TwinCorp knows that $3$ months later it will need to borrow $7,000,000$ for $4$ months. TwinCorp signs an FRA agreement with a bank dealer which commences in $3$ months. The FRA rate is $3\mathrm{.}8\%.$ Assume the $2-$month LIBOR reference rate in four months is realised as $4\mathrm{.}2\%.$

a$)$ Calculate the amount of FRA compensation and show who pays whom. $(15$ Marks$)$

b$)$ Show that the net cost of borrowing for TwinCorp on annual basis is equal to the FRA. rate. $(10$ Marks$)$

c$)$ What difference will there be as regards the FRA if TwinCorp does not borrow?

Explain your answer. $(10$ Marks$)$

d$)$ Explain the difference between FRA and Forward Forward Agreement. $(15$ Marks$)$

Assume that each month consists of $30$ days while a year is $365$ days.