Suppose an investment manager expected to invest $20,000,000 in 45 days. At the end of those 45 days, the manager would invest the funds for 60 days based on LIBOR. Fearing interest rates would fall, the manager locked in a rate based on a dealer quote of 5.2% using a FRA. Further assume that on the settlement date of the FRA, the 60-day LIBOR is 5.6%.
1. Would the investment manager have gone long or short in this case?
2. What is the payoff on a long position in the FRA at settlement?