You plan to borrow $1 million in 3 month's time which you will do by issuing 10 90-day BABs. You are concerned that rates could increase over this time and so decide to hedge your position using a 90-day BAB futures contract which is currently priced at $92.25. 

 

After three months the yield on a 90 day BAB is 12%.

 

 A.Calculate the net interest you would pay if you do not hedge. 

 

B.Calculate the net interest you would pay if you do hedge. 

 

Now imagine that instead, the yield on a 90 day BAB is 5%.

 

C.Calculate the net interest you pay if you hedge as you did.

Answer rating: 100% (QA)

A If you do not hedge your position and the yield on a 90day BAB after three months is 12 you would ... View the full answer