Explain the stuff in red in simple terms (more in depth).

6 The following question is about interest rate futures. 6 a (4 points) You are a corporation that is planning on issuing a $15m 5-year bond in several months. You would like to use bond futures to protect yourself from this risk that interest rates change before you issue the bond. Which bond futures contract would you use, would you go long or short the contract and how many contracts would you trade? Long Short US Treasury Bond Futures Ultra US Treasury Bond Futures Ultra 10-year US Treasury Note Futures 10-Year US Treasury Note Futures 5-Year US Treasury Note Futures 2-Year US Treasury Note Futures Number of Contracts 150 6 b (2 points) You enter the bond futures position described in part a at a price of 104'12 and exit at a price of 102'16 How much money did you make or lose? You are short 150 contracts. You make 150 100,000 (104+12/32-102-16/32)-281,250 or 1,875 per contract. 6 c (4 points) Briefly explain how the profits/losses in part b constitute a hedge for your exposure in part a? Answer: The gains are due to interest rate increases. These offset the increased cost of interest that will be paid on the bond issuance 6 d (6 points) You are planning on borrowing 10m dollars in 120 days for 180 days and would like to use Eurodollar futures to hedge the risk that interest rates increase between now and when you borrow. The first Eurodollar futures contract expires in 30 days and there are contracts expiring every 90 days. Identify your hedge Expiry30 300 120 Short 10 210 Short 10 390 Long/Short Contracts