as detailed as possible! thanks!

Low Brechin ple has borrowing outstanding of 350 million and the interest rate is re-set on every three months at the three-month LIBOR + 3.5 per cent. The next date at which the interest rate will be re- set is September 1st. The company's treasurer anticipates that interest rates will increase before then and has decided to hedge the exposure to interest risk through the use of interest rate futures contracts. The current prices of interest rate futures is given below in the FT extract. FT EXTRACT INTEREST RATE FUTURES Feb 21 Open Sett Change High Est. vol Open in Euribor 3m* May 95.80 -0.03 Euribor 3m* Sep 96.24 96.18 -0.09 96.25 96.12 263,256 594,82 Euribor 3m* Dec 96.41 96.36 -0.09 96.41 96.29 266,433 540,06 Euribor 3m* Mar 96.49 96.46 -0.08 96.50 96.39 204,292 428,10 Euroswiss 3m* Mar 97.28 -0.01 97.28 97.26 5,187 62,70 Euroswiss 3m* Jun 97.44 97.45 -0.02 97.47 97.38 15,804 62,59 Sterling 3m* May 94.36 +94.36 Sterling 3m Jun 94.73 94.67 -0.08 94.74 94.61 106,810 611,76 Sterling 3m* Sep 95.02 94.97 -0.09 95.04 94.88 179,448 534,96 Sterling 3m Dec 95.26 95.20 -0.08 95.27 95.11 169,694 497,53 Futures information The contract size is 500,000 The tick size is 12.50 The initial margin is 500. 97.27 i. Set up the hedge today and briefly explain, using the appropriate terminology, what you have done. It should be assumed the spread on each side of the average futures quote is 0.04. ii. On September 1st the futures contract stands at 98.00 this implies that the three months LIBOR is 2 per cent. Illustrate the cash flows in the money market and the futures market, clearly setting out the effective cost Low Brechin ple has borrowing outstanding of 350 million and the interest rate is re-set on every three months at the three-month LIBOR + 3.5 per cent. The next date at which the interest rate will be re- set is September 1st. The company's treasurer anticipates that interest rates will increase before then and has decided to hedge the exposure to interest risk through the use of interest rate futures contracts. The current prices of interest rate futures is given below in the FT extract. FT EXTRACT INTEREST RATE FUTURES Feb 21 Open Sett Change High Est. vol Open in Euribor 3m* May 95.80 -0.03 Euribor 3m* Sep 96.24 96.18 -0.09 96.25 96.12 263,256 594,82 Euribor 3m* Dec 96.41 96.36 -0.09 96.41 96.29 266,433 540,06 Euribor 3m* Mar 96.49 96.46 -0.08 96.50 96.39 204,292 428,10 Euroswiss 3m* Mar 97.28 -0.01 97.28 97.26 5,187 62,70 Euroswiss 3m* Jun 97.44 97.45 -0.02 97.47 97.38 15,804 62,59 Sterling 3m* May 94.36 +94.36 Sterling 3m Jun 94.73 94.67 -0.08 94.74 94.61 106,810 611,76 Sterling 3m* Sep 95.02 94.97 -0.09 95.04 94.88 179,448 534,96 Sterling 3m Dec 95.26 95.20 -0.08 95.27 95.11 169,694 497,53 Futures information The contract size is 500,000 The tick size is 12.50 The initial margin is 500. 97.27 i. Set up the hedge today and briefly explain, using the appropriate terminology, what you have done. It should be assumed the spread on each side of the average futures quote is 0.04. ii. On September 1st the futures contract stands at 98.00 this implies that the three months LIBOR is 2 per cent. Illustrate the cash flows in the money market and the futures market, clearly setting out the effective cost