$($a$)$ Your money market broker quotes you the following spot rates:

$3-$month KLIBOR $=8\%$

$6-$month KLIBOR $=9\mathrm{.}5\%$

What should the correct price of a $3-$month KLIBOR futures contract be$?$

$(2$ marks$)$

$($b$)$ A bank has agreed to provide its client with a fixed rate $3-$month RM$20$ million loan $90$ days from today. The loan is priced at $2\%$ per annum. Assume that the cost of funds of the bank is the KLIBOR rate. The following quotes have been given:

$3-$month KLIBOR $=9\%$

$3-$month KLIBOR futures $=90\mathrm{.}0($matures in $90$ days$)$

i$.$ How would the bank protect itself from a rise in interest rates? State the strategy.

$(2$ marks$)$

ii$.$ Assuming interest rates rise by $2\%$ over the next $3$ months, show using computations, that the bank has locked$-$in the interest spread.

$(6$ marks$)$