Matthew Enters into a Forward Rate Agreement (FRA)with the Local

Multiple Choice

Matthew enters into a forward rate agreement (FRA) with the local bank.The current one-year forward rate is 4%.If the yield on a one-year T-Bill in one year is 3.5%, what payment will be made to settle the agreement?

A) Matthew would pay the bank 0.5%.
B) Matthew will use the market rate rather than the FRA rate.
C) The bank would pay Matthew 0.5%.
D) Matthew would not exercise his option.