Your company needs to borrow $10 million in five months time for a period of six months (180 days). You are concerned that the changes in interest rates will be unfavourable. You approach an FRA dealer, who provides the following forward quotations:

5Mv11M(19): 8.758.55

5Mv6M(19): 8.658.45

b) Assuming the reference rate on the settlement date is 7.5 per cent, which party to FRA is required to make a payment and why? (2 marks)

c) Calculate the compensation amount on settlement date. Show all calculations. (4 marks)