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4. XYZEE Sdn. Bhd. has a RM10 million floating rate loan outstanding. The interest rate on the said loan is reset every THREE (3) months for the next 3 months with the interest fixing period ONE (1) month before the due date of the said 3-month floating rate loan. Interest is payable at the end of each 3 months' period. Due to the recent volatile money market, the corporate treasurer thinks that interest rate is likely to rise for the next 3-month interest roll-over period in about 1 month's time. Current 3-month interest rate is 6% p.a. and the corporate treasurer can get a rate of 6.1% p.a. for a 3-month forward rate agreement (FRA) starting 1 month from now which is the contracted review period for each 3-month roll-over of the loan. Instead of entering into a FRA, he was told by the company's banker that interest rate futures could also be used to protect the company's interest. He is now undecided on which course of action to take. (a) Assuming the corporate treasurer has decided to enter into a FRA contract over the counter (OTC) with the company's banker, advise him on the gain or loss if the following two scenarios occur: i. if interest rate rises to 7% as expected by the corporate treasurer; ii. if interest rate drops to 5%, contrary to the corporate treasurer's expectation. 4. XYZEE Sdn. Bhd. has a RM10 million floating rate loan outstanding. The interest rate on the said loan is reset every THREE (3) months for the next 3 months with the interest fixing period ONE (1) month before the due date of the said 3-month floating rate loan. Interest is payable at the end of each 3 months' period. Due to the recent volatile money market, the corporate treasurer thinks that interest rate is likely to rise for the next 3-month interest roll-over period in about 1 month's time. Current 3-month interest rate is 6% p.a. and the corporate treasurer can get a rate of 6.1% p.a. for a 3-month forward rate agreement (FRA) starting 1 month from now which is the contracted review period for each 3-month roll-over of the loan. Instead of entering into a FRA, he was told by the company's banker that interest rate futures could also be used to protect the company's interest. He is now undecided on which course of action to take. (a) Assuming the corporate treasurer has decided to enter into a FRA contract over the counter (OTC) with the company's banker, advise him on the gain or loss if the following two scenarios occur: i. if interest rate rises to 7% as expected by the corporate treasurer; ii. if interest rate drops to 5%, contrary to the corporate treasurer's expectation

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