You are the CFO of a large financial institution and your firm has agreed that in one month, it will provide a $1M loan to Joshua's Widget Factory. The terms of the loan state that in three months, the principle and interest will be repaid in one lump sum. The interest rate applied to the loan will be Libor + 100bps (bps = basis points; 100 basis points = 1%) and will be determined at the start of the loan. Concerned about falling interest rates, you decide to enter into a forward rate agreement to hedge 100% of your risk. Hint. The forward rate is 3.95% + 100bps

1.) Are you long or short the forward rate agreement?

2.) Draw and label a timeline that contains the initiation and expiration of the FRA as well as the maturity of the loan.

3.) Given the circumstances, what type of FRA would be appropriate (e.g. 12 x 24)?

Use the following term structure of Libor to answer the following questions:

Time	30-day Libor	60-day Libor	90-day Libor	180-day Libor
t=0	3.75%	3.85%	3.95%	4.00%
t=3	4.00%	4.50%	4.75%	5.00%

4.) Describe the cashflow at t=0.

5.) When the FRA expires, how much money will your firm pay?

6.) When the FRA expires, how much money will your firm receive?

7.) Did your firm gain or lose money as a result of the FRA?

8.) DMAMS?