A financial institution expects to borrow $100,000 in 6 months time. The current rate of interest is 5% p.a. and is expected to rise. Bank bill futures contracts with a face value of $100,000 are currently trading at 5.5%.

Required:

Show the steps in the borrowing hedge, outlining the underlying and futures positions and the net cost of funds if interest rates rise to 7% p.a. over the next 6 months. Show all calculations. Use dot points where necessary.