This is a problem that has TWO questions. Therefore, please choose TWO answers (one choice for each question) to get full credit for this questions, otherwise you will only get partial points. The LIBOR yield curve is flat at 7% per annum. An FRA is designed where the holder pays fixed interest at the rate of 7.2% per annum for a 6-month period on a principal of $10 Million starting in three years. Note that all rates are quoted with semi-annual compounding. #1) What is the cash flow that is settled at the three-year point? Is it a cash inflow or an cash outflow to you?

#2) What is the current value of an FRA?

1a. +9661.84 ; cash inflow

1b. -9661.84 ; cash outflow

1c. -10000 ; cash outflow

1d. +10000 ; cash inflow

2a. value of an FRA = +9684

2b. value of an FRA = -9684

2c. value of an FRA = +7860

2d. value of an FRA = -7860