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  3. your firm needs to issue 3 month bills in 3 months

Your firm needs to issue 3 month Bills in 3 months to borrow $10 mill....

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Accounting

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?

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