Assume it is now 1 January: ABC Ltd will be arranging a six-month, $10M loan at an interest rate based on six-months LIBOR to commence, in 6 month’s time, on July 1^st. ABC Ltd wishes to hedge against an increase in interest on this loan by using an FRA. Hence on 1 January, the company buys a six-twelve FRA from the bank at 8%. 

 

Calculate the amount payable by the company or the bank if on the settlement date, which is 1 July, the six months LIBOR has moved to:

1. a. 14 r
2. b. 4
3. c. Any other methods recommended hedging the interest rate risk of ABC Ltd?