1. 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 6% per annum. An FRA is designed where the holder receives fixed interest at the rate of 8% per annum for a 6-month period on a principal of $1Million starting in two years. Note that all rates are quoted with semi-annual compounding.

   1) What is the cash flow that is settled at the two-year point? Is it a cash inflow or an cash outflow to you?

   2) What is the current value of an FRA?

   		1) +$10,000; cash inflow
   		1) +$9,708.74; cash inflow
   		1) -$10,000; cash outflow
   		1) -$9,708.74; cash outflow
   		2) value of an FRA = +$8,626
   		2) value of an FRA = -$8,626
   		2) value of an FRA = +$9,708
   		2) value of an FRA = -$9,708