A business plans to borrow approximately $40 million in short-term funding through the issue of commercial paper in three months time. The business does not have a view on what is likely to happen to interest rates over the next three months, but it would be very satisfied if it could obtain its funding at the current yield.

Using the following data:

Todays data:

i. current commercial paper yields 5.00 per cent per annum

ii. 90-day bank-accepted bills futures contract 94.75.

Data in three months:

iii. commercial paper yields 6.00 per cent per annum

iv. 90-day bank-accepted bills futures contract 94.25.

b) Explain why the final outcome may not be a perfect hedge. Provide a description of the risks that contribute to such an outcome. (6 marks)