Assume that the date is September $1,2022.$ You are employed by ABC Bank Limited, a bank that intends to issue certificates of deposits $($CDs$)$ in the amount of $$20$ million with a $3-$month tenor in December $2022.$ The CD interest rates are based on $3-$month LIBOR plus $0\mathrm{.}5\%$ at the start date. Although interest rates are currently relatively low, the bank's board is worried that they may soon rise sharply. For the $3-$month Eurodollar futures contracts, the corresponding futures rates are $4\mathrm{.}0\%($December $2022),5\mathrm{.}0\%($March $2023),$ and $6\mathrm{.}0\%($June $2023).$

REQUIRED:

A$.$ What is your bank$$s specific cash market risk on September $1,2022?[2$ MARKS$]$

B$.$ Should the bank buy or sell Eurodollar futures contracts to hedge its borrowing costs associated with the CDs$?[2$ MARKS$]$

C$.$ Explain how the hedge should work. $[2$ MARKS$]$

D$.$ Which Eurodollar futures contract should the bank use and explain why it is best? $[2$ MARKS$]$

E$.$ Assume that the company takes the futures position that you recommended above at the rate available on September $1,2022,$ and that at the expiry, the final closing futures rate was $5\mathrm{.}0\%.$ Calculate the profit or loss on the futures contract, the opportunity gain or loss in the cash market, and the effective cost to the bank on its borrowing. $[12$ MARKS$]$