Calculating Interest on Libor Spot and FRA Payments, in 30 days a UK company expects to make a bank deposit of £5,000,000 for a period of 90 days at 90-day Libor set 30 days from today. The company is concerned about a decrease in interest rates and hence enters in a 1 X 4 receive-fixed FRA today that is advanced set, advanced settled. The appropriate discount rate for the FRA settlement cash flows is 0.30%. After 30 days the Libor in British pounds is 0.75%$.

a). What is the interest rate actually paid on the UK company’s bank deposit?

b). If the FRA was initially priced at 0.80%, what is the payment received to settle it?

c). If the FRA was initially priced at 0.70%. what is the payment received to settle it?

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