15You have the pay floating, receive fixed side of a $1 billion interest rate swap.Payments are every

3 months. Today is Sept. 15 and you want to hedge the interest rate risk on the payment scheduled to occur next June 15.(Treat the payment periods as 1/4 of a year; the question is not about day-count conventions.)Here are the details (as always, interest rates are quoted on an annualized basis):

Notional principal:$1 billion

Your position in the swap:Each payment date you must pay 3 months interest on the notional principal at the 3-month LIBOR rate that was set in the market at the beginning of that payment period, 3 months earlier.You will receive interest on the notional principal at a fixed 6.00% rate.

Interest rates as of Sept. 15:

Current spot interest rate for the next 6 months:6.00%

Eurodollar futures prices: DEC94.00

MAR92.00

JUN90.00

a.To hedge your risk exposure, will you buy futures or sell futures?

b.Which futures expiration should you use?

c.How many futures contracts should you trade, taking into account the fact that your futures position will be marked to market every day, starting today?