-Day-count convention: use a 360 day-count

Suppose the following JIBAR futures contract prices (Table 1.1) and JIBAR spot rates (Table 1.2) are quoted on 25 November 2022 (i.e. 21 days before the December 2022 contract expires).

Note that the spot rates are quoted as nominal annual (NAC) rates, while the futures rates are quoted as annual effective rates (AER).

In this module, JIBAR futures can be quoted as o price or index format (i.e. index of 100 yield, where the yield is a nominal annual rate [i.e. NAC]); or o yield format (i.e. by quoting the annual effective rate [AER]).

The JIBAR futures in Table 1.1 below are quoted in Index format (i.e. 100 yield).

Table 1.1: JIBAR Futures contract prices on 25 November 2022 and their Index values

Notes: Initial Margin required per JIBAR contract is R100

December 16, 2022 (expiration in 21 days):	94.5115
March 16, 2023 (expiration in 111 days)	93.8204
June 16, 2023 (expiration in 201 days)	93.3737
September 16, 2023 (expiration in 291 days):	92.5281
December 16, 2023 (expiration in 381 days):	90.4488

1.Suppose your company intends to borrow R20 million, for 12 months, starting in mid-March 2023. Your bank will only be willing to offer you a rolling 3-month floating rate loan (i.e. loan rate calculated every three months on the first day of the loan). So the first interest rate will only be known in March 2023. Your company is worried that interest rates will increase between today and the start of the 12-month loan period (i.e. March 2023). Explain which one of the futures contracts in the table above you should use to hedge the interest rate risk for the first set interest rate in 2023. Explain in detail, including number of contracts used. (3)

1.2.Suppose you are worried that interest rates will increase any time(s) during the whole loan period (i.e. between 25 Nov 2022 and December 2023). 1.2.1. Explain how you can apply a strip hedge with the futures contracts in the table above to hedge some of this interest rate risk. Explain in detail, including number of contracts used. (3) 1.2.2. Explain how you can apply a stack hedge with the futures contracts in the table above to hedge some of this interest rate risk. Explain in detail, including number of contracts used. (4)