Rock Spring plc decides it wants to borrow capital for a 6-month period in two 3-month instalments. The company can borrow at LIBOR + 2 per cent. LIBOR rates today are 4 per cent. However, because the firm must agree the contract in advance and pay later, it will be exposed to the risk of interest rates over the next 3 months, since the level of its second interest payment will not be established until the end of the first period. In order to manage this risk, the firm decides to acquire FRA from an investment bank. The company receives the following FRA quotes:

Which quote should the firm use to hedge its exposure and at what interest rate?

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Period 3 v 6 3 v 6 6 v 9 6 v 9 9 v 12 9 v 12 Dealer 1 1.8% - 1.85% 1.7% - 1.86% 2% - 2.3% 3% -3.5% 3.2% - 3.9% 3.7% 4% - Dealer 2 1.9% -1.95% 1% - 1.82% 2.1% 2.5% 2.9% - 3.3% 3% -3.7% 3.8% - 4.2%