3. Swipe Technologies has $10 million of floating rate bonds that mature in 3 years and is concerned about interest rates rising in the next year.It wishes to hedge this risk with an interest rate futures contract.A one year Eurodollar futures contract is priced at 95.5.

a.What is the current interest rate?

100 - 95.5 = 4.50%

b.Should the Treasurer buy or sell a futures contract?

Sell

c.If the interest rate in one year is 5.2% what would be the gain or loss on the futures contract in percent and dollar amount (notational of $10 m)?

Sell at 95.5

Buy at 100 - 5.2 = 94.8

Gain = 0.007 x $10m = $70,000

d. What is the net gain or loss considering both the bonds and the futures contracts?