a 5 million purchase contract is signed for equipment delivery 3 months from now, and the actual payment will be made 3 months after the delivery, the business has a lump sum receivable of 5 million 8 months from now thus it needs to finance the 5 million until the receivable comes in assuming the current interest rate is 5 % for this business, and assume the fed is likely to increase the interest rate 1-2 times in the few months. As a result the business comest o you for advice on interest rate hedging.

Part B.

If the implied LIBOR is 4.6% now, and the implied LIBOR will be 5.55% (.95% increase) when the business borrows $5 million. Assuming the business can find the interest rate futures contracts with he same maturity sate, and we can ignore the daily cash settlement, how much will the business pay or receive from the interest rate futures contracts?

Hint : Each interest rate futures contract has 1 million underlining assets, and the price of the contract is $100 X (1- implied LIBOR)