EXMAPLE $2($DEPOSITOR$)$

Given: Principal amount to be deposited $...5$m $($to be deposited $6$months from now$).$

Deposit. Period. $...................................6$months. It is now June

Currant Deposit Rate.......................... $10\%$

The deposit rate is expected to decrease by $2\%$ in six months$$ time

The lender wishes to hedge the perceived interest rate risk with interest rate futures

Treasury. Bill Futures at the LIFE $($London$)$ Contract Size $500000.$

Maturity $($Six months$)$ in December

Initial Future price.................. $...86\mathrm{.}25.$

Tick size.................................... $0\mathrm{.}01\%$

Futures Price is expected to decrease by $2\%.$

REQUIRED:

@Compute: the following.

$$ Magnitude of interest Rate Risk

$$ Tick Value

$$ Expected Gain per Contract.

$$ Number of Contracts Needed.

$($b$)$ Set the hedge Position.

$($c$).$ Calculate the hedge efficiency if in December the deposit rate decrease by $4\%$ and futures price decreases by $2\%.$

$($d$).$ Calculate the Effective Deposit Rate under $$ above