Question: ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London.

ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent, but ABC is worried about an increase in three-month LIBOR 3 months from now. What could they do to hedge? Explain why.

Sell a 3 6 FRA in the amount of $4 million.
Buy a 3 6 FRA in the amount of $4 million.
Buy a 3 3 FRA in the amount of $4 million.
Buy a 3 9 FRA in the amount of $4 million.

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