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Hedging Risk Analysis Overview You are working for an investment bank and you are responsible for three high net worth clients. The first has a share portfolio valued at approximately $1,000,000 and is concerned that the share market might fall. The second client acts on behalf of a large Australian company which is looking to invest in a major project at the end of the year and is concerned that interest rates may rise. The third client works for a large Queensland manufacturing company whose major expense is electricity. This client is concerned about a rise in electricity prices. Description - Question 2 (6 Marks) You second client acts on behalf of a large Australian company who is looking to invest in a major project at the end of the year. This client knows that the company will need to borrow $20,000,000 in December for 3 months through debt instruments and is concerned about an increase in interest rates between now and then. They would like you to set up an interest rate hedge to protect them from any such increases in interest rates. The contract will be established today (19th February 2021) and should be in place until at least December 19th, 2021. Step 1 - Choose an appropriate futures contract. A snapshot of BAB futures prices as of February 19th is provided. Determine which contract should be chosen stating the day of expiry for the contract. Determine the price and yield of the appropriate contract. Step 2 - Determine the number of futures contracts required. Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position. Determine whether they should be 'buy' or 'sell positions. Step 3 Calculate the total cost of raising the funds for the company under two (2) potential future scenarios. Determine the total cost of raising funds for your client assuming two different potential future outcomes: 1) an ending BAB price of 99.95 and 2) an ending BAB price of 99.85. Hedging Risk Analysis Overview You are working for an investment bank and you are responsible for three high net worth clients. The first has a share portfolio valued at approximately $1,000,000 and is concerned that the share market might fall. The second client acts on behalf of a large Australian company which is looking to invest in a major project at the end of the year and is concerned that interest rates may rise. The third client works for a large Queensland manufacturing company whose major expense is electricity. This client is concerned about a rise in electricity prices. Description - Question 2 (6 Marks) You second client acts on behalf of a large Australian company who is looking to invest in a major project at the end of the year. This client knows that the company will need to borrow $20,000,000 in December for 3 months through debt instruments and is concerned about an increase in interest rates between now and then. They would like you to set up an interest rate hedge to protect them from any such increases in interest rates. The contract will be established today (19th February 2021) and should be in place until at least December 19th, 2021. Step 1 - Choose an appropriate futures contract. A snapshot of BAB futures prices as of February 19th is provided. Determine which contract should be chosen stating the day of expiry for the contract. Determine the price and yield of the appropriate contract. Step 2 - Determine the number of futures contracts required. Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position. Determine whether they should be 'buy' or 'sell positions. Step 3 Calculate the total cost of raising the funds for the company under two (2) potential future scenarios. Determine the total cost of raising funds for your client assuming two different potential future outcomes: 1) an ending BAB price of 99.95 and 2) an ending BAB price of 99.85