Design a hedging strategy for mitigating the interest rate risk of a company that is to rollover
Question:
Design a hedging strategy for mitigating the interest rate risk of a company that is to rollover an existing $1 million bill debt facility in three months and is concerned that interest rates may rise before the rollover date. The information of bank bill rate and BAB futures contracts, as of today and in three months, is listed below:
Today's data:
90-day bank bill rate is 8.00% per annum;
SFE BAB futures contract quoted at 91.00.
Data in three months' time:
90-day bank bill rate is 9.50% per annum;
SFE BAB futures contract quoted at 89.50.
Answer the following 4 parts, from a) to d), and show your calculations.
a)Will the company buy, or sell, a BAB futures contract today? Why?
b)What is the price of the BAB futures contract today?
c)When the company closes out its futures position, will it make a profit or loss, and what will be the dollar amount?
d)Calculate the effective cost of funding for the company in three months' time.