Problem:
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.
Required:
Question: 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%
Note: Please provide reasons to support your answer.