As an alternative to a nine-month, \(4 \%\) fixed-rate loan for \(\$ 10\) million, the O'Brien Beverage Company is considering a synthetic fixed rate loan formed with a \(\$ 10\) million floating-rate loan from First National Bank and a Eurodollar strip. The floating-rate loan has a maturity of 270 days (0.75 of a year), starts on December 20, and the rate on the loan is set each quarter. The initial quarterly rate is equal to \(3.5 \% / 4\), the other rates are set on 3/20 and 6/20 equal to one fourth of the annual LIBOR on those dates plus 100 basis points: (LIBOR \% + 1\%)/4. On December 20, the Eurodollar futures contract expiring on \(3 / 20\) is trading at 97 (IMM index) and the contract expiring on 6/20 is trading at 98 and the time separating each contract is \(0.25 /\) year.

a. Explain how O'Brien could use the strip to lock in a fixed rate. Calculate the rate the O'Brien Company could lock in with a floating-rate loan and Eurodollar futures strip.

b. Calculate and show in a table the company's quarterly interest payments, futures profits, hedged interest payments (interest minus futures profit), and hedged rate for each period (12/20, 3/20, and 6/20) given the following rates: LIBOR \(=4 \%\) on \(3 / 20\) and LIBOR \(=3 \%\) on \(6 / 20\).