Suppose that in order to hedge interest rate risk on your borrowing, you enter into an FRAthat will guarantee a 6%effective annual interest rate for 1 year on $500,000.00.
On the date you borrow the $500,000.00, the actual interest rate is 5%. Determine the dollar settlement of the FRA assuming
a. Settlement occurs on the date the loan is initiated.
b. Settlement occurs on the date the loan is repaid.