the markets for 3-month and 6-month funding and investments. The rates available for these matu- rities are presented in Exhibit 13.1. The ALM manager also expects that 3-month LIBOR in three months hence to be 5.10%.3The bank can typi- cally fund its portfolio at LIBOR while it is able to lend at LIBOR plus 100basispoints.   EXHIBIT 13.1 Hypothetical Money Market Rates   Term LIBOR Bank Rate   3-month 5.50% 6.50% 6-month 5.75% 6.75% Expected 3-month rate 3-months hence 5.10% 6.10% 3´6 Forward Rate Agreement 6.60%     3This forward rate could be obtained by observing the price of a Eurodollar CD fu- tures contract or simply the ALM managers best guess based on his/her intuition and experience.     The bank could adopt any of the following strategies, or a combina- tion of them.   ■ Borrow 3-month funds at 5.50% and lend this out for three months at 6.50%. This locks-in a return of 1% for a 3-month period. ■ Borrow 6-month funds at 5.75% and lend for six months at 6.75%; again this earns a locked-in spread of 1%. ■ Borrow 3-month funds at 5.50% and lend for six months at 6.75%. This approach would require the bank to refund the loan in 3-months time, which it expects to be able to do at 5.10%. This approach locks in a return of 1.25% in the first 3-month period, and an expected return of 1.65% in the second 3-month period. The risk of this tactic is that the 3-month rate in three months time does not fall as expected by the ALM manager, reducing profits and possibly leading to loss. ■ Borrow in the 6-month at 5.75% and lend for a 3-month period at 6.50%. After this period, lend the funds for either three or six months. This strategy is inconsistent with the ALM managers view however, who expects a fall in rates and so should not wish to be long funds in three months time. ■ Borrow 3-month funds at 5.50% and again, lend six months at 6.75%. To hedge the gap risk, the ALM manager simultaneously buys a 3´6 FRA to lock in the 3-month rate in three months time. The first period spread of 1.25% is guaranteed, but the FRA guarantees only a spread