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

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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 in part B.

Reference no: EM133495833

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