Suppose that in order to hedge interest rate risk on your le

Suppose that in order to hedge interest rate risk on your lending, you enter into an FRA that will guarantee a 6.1% effective annual interest rate for 1 year on $4,000,000. On the date you lend the $4,000,000, the actual interest rate is 6.8%. To settle the FRA on the date the loan is repaid, you would...

a.

pay $28,000.

b.

pay $26,217.

c.

receive $28,000.

d.

receive $26,217.

please explain steps

Solution

Correct option is > c. receive $28,000

Total receipt = Principal x (Lending rate - Borrowing rate)

Total receipt = 4000000 x (6.8% - 6.1%)

Total receipt = $28,000