A company knows that it will need to borrow $$1\mathrm{.}5$ million in three months$$ time for a twelve$-$month period. It can borrow funds at LIBOR $+50$ basis points. LIBOR rates today are at $5\%$ but the company$$s treasurer expects rates to go up to about $6\%$ over the next few weeks, in which case the company will be forced to borrow at higher rates unless some sort of hedge is transacted to protect the borrowing requirement.

Required

a$)$ Determine, with reasons, whether the treasurer should buy or sell a $($Forward Rate Agreement$)$ FRA

b$)$ Determine the FRA to be bought or sold to cover the contract period.

c$)$ A bank quotes $5(1)/(2)\%($FRA rate$)$ for the FRA for a notional amount of $$1\mathrm{.}5$ million. Assume that three months from now the LIBOR rate will indeed go up to $6\%,$ determine the reference rate or benchmark rate; i$.$e$.$ the rate at which the treasurer will borrow funds.

d$)$ State whether the treasurer will receive compensation from the bank or will pay the bank

e$)$ Calculate the settlement amount