FRA in Wardegul Co – Sep/Dec 2017

I tried to understand your question but couldnt, however i will explain the solution

In-case interest rate rose to 1.1%

Our capacity to deposit is 4.2 -0.3 + 1.1(increase as above) = 5%

Actually 5.3 % came out to be (4.2 +1.1) but we made an agreement with a bank of 5.02 %. meaning that we actually earned 5.3% but due to agreement which is lower at %5.02 and to fullfil that agreement because we wanted our liability of interest to be certain. We entertain our liability at 5.02, by giving the excess to bank, which is 5.3% minus 5.02% = 0.28.

In case you are saying FRa is till June but we are making agreement (before) as the dates dont match . Thats the whole point of hedging, we dont want to be uncertain what will be interest rate in January so make an agreement with bank before, so from Jan to June we will know our deposit will fetch a certain interest. In case we didnt hegde and interest rate dropped to 4% lets say in Jan, we would have lost on our deposit. but the whole point of hedging is to be certain of our cash flows rather to avoid a loss. Interest as in the question could have rosed to 7 % as well lets say, but its better to be safe rather than sorry

got it