Suppose that today is Monday, February 19 and you have a loan of $10,000,000 outstanding, on which

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Question:

Suppose that today is Monday, February 19 and you have a loan of $10,000,000 outstanding, on which you will have to make a floating-rate interest rate payment on Friday, February 23. The interest payment is determined based on a 3-month SOFR rate on that day. You fear that in the next several days the rate might rise. So, you hedge yourself by trading 3-month SOFR futures. Assume that you enter the position at the settle price of the day on Monday, February 19.

a. To hedge yourself, which position in 3-month SOFR futures will you take (i.e. buy or sell, contract maturity, and the number of contracts)?

b. What is your daily gain or loss on your future position (on Tuesday, Wednesday, Thursday, and Friday)?

c. What is the interest payment that you have to make on Friday, February 23, on your $10,000,000 loan? d. What is the net cost to you, taking into account the gains/losses on your hedge, plus the interest payment on the loan (ignore the time value of money)?