a) You have just received the following information from your broker regarding spot rates;

3-month KLIBOR = 7.20% 6-month KLIBOR = 8.55% (i) Calculate the implied forward rate. (ii) Determine the correct price of a 3-month KLIBOR futures contract.

b) As Credit Officer of a large Malaysian bank, you have agreed to provide an important institutional customer with a fixed rate 3-month RM20 mil for 90 days from today and you had priced the loan at 12% per annum. Your cost of funds is the KLIBOR rate. Todays quotations are as follows:

3-month KLIBOR = 9.00% 6-month KLIBOR futures = 90.0

(i) Outline the appropriate hedging strategy to protect you from the risk of a rise of interest rate.

(ii) If interest rates rise or fall by 2% over the next 3 months, prove that your hedge strategy above would have protected your interest spread or total earnings.