An institutional investor speculates the rise of interest rate in twelve months time. It therefore enters today with a local bank a twelve-month forward rate agreement to borrow Eurodollar for six months at 1.96% at contract expiration, with a notional principal of USD10 million.
Calculate the institutional investor’s payment to or receipt from the local bank on the contract expiry date with respect to the forward rate agreement if the interest rate on 6-month LIBOR twelve months later were 4.00%