A corporate treasurer expects to receive £20 million in late September, six months hence. The money will be needed for expansion purposes the following December. However, in the intervening three months it can be deposited to earn interest. The treasurer is concerned that interest rates will fall from the present level of 8 per cent over the next six months, resulting in a poorer return on the deposited money.

 A forward rate agreement (FRA) is available at 8 per cent. Three-month sterling interest futures starting in late September are available, priced at 92.00. Assume: No transaction costs and that a perfect hedge is possible. 

Required 

(a) Describe two hedging transactions that the treasurer could employ. 

(b) Show the profit/loss on the underlying and the derivative under each strategy if market interest rates fall to 7 per cent, and if they rise to 9 per cent.