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Ford has a $20 million Eurodollar deposit maturing in 2 months that it plans to roll over for a further six months. The company treasurer feels that interest rates will be lower in two months when rolling over the deposit. Suppose the current 6-month LIBOR rate is 7.875%.
a) Explain how Ford can use an FRA at 7.65% from Banque Paribas to lock in a guaranteed six-month rate when it rolls over its deposit in two months (e.g. buy/sell an FRA, underlying principle, what rate will apply and when).
b) In two months, 6-month LIBOR turned out to be 8%. How much will Ford receive/pay on its FRA?
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