Suppose that KF Exports enters into an FRA with Interfirst Bank with a notional principal of $50 million and the following terms: in six months, if LIBOR is above 6 percent, KF will pay Interfi rst according to the standard FRA formula.
On the other hand, if LIBOR is less than 6 percent, Interfirst will pay KF. If LIBOR is 5.5 percent in six months, who pays and how much will the company pay? What if LIBOR is 6.5 percent?