Xavier Trust is planning to invest \(\$ 10\) million for one year. As an alternative to a oneyear fixed-rate note paying \(2.5 \%\), XSIF is considering a synthetic investment formed by investing in a Second National Bank one-year floating-rate note (FRN) paying LIBOR plus 100 basis points and taking a position in a Eurodollar futures strip. The FRN starts on \(12 / 20\) at \(3.00 \%(\mathrm{LIBOR}=2.00 \%)\) and is then reset the next three quarters on \(3 / 20\), 6/20, and 9/20. On December 20, the Eurodollar futures contract expiring on 3/20 is trading at 97 (IMM index), the contract expiring on 6/20 is trading at 98 , and the contract expiring on \(9 / 20\) is trading at 98.50 ; the time separating each contract is \(0.25 /\) year and the reset dates on the floating-rate note and the expiration dates on the futures expiration are the same.

a. Explain how Xavier Trust could use a strip to lock in a fixed rate. Calculate the rate Xavier could lock in with a floating-rate note and Eurodollar futures strip.

b. Calculate and show in a table Xavier's quarterly interest receipts, futures profits, hedged interest return (interest plus futures profit), and hedged rate for each period (12/20, 3/20, 6/20, and 9/20) given the following rates: LIBOR \(=3.5 \%\) on \(3 / 20\), LIBOR \(=3 \%\) on \(6 / 20\), and LIBOR \(=1 \%\) on \(6 / 20\).