Your firm needs to issue 3 month Bills in 3 months to borrow $10 mill. Given inflation risks, the firm is concerned about possible rises in IRs. You are tasked with setting a hedging strategy using an FRA so you enter into a 3 x 6 FRA with a fixed rate of 3.15%

You observe LIBOR spot rates: 3months = 2.75% and 6months = 2.95%.

The 3 month LIBOR spot rate stays at 2.75% in 3months time. What will the payoff from the FRA be? What will the effective cost of borrowing be?