It is November 2021 and the Treasurer of Barry Plc expects to be able to receive 20m in April 2022 in 6 months. The money is going to be spent in June on a large piece of machinery, but for 3 months between April and the end of June it will simply be sitting on deposit in the companys accounts. The interest rates currently available to the Treasurer are 1%. The Treasurer is concerned that the banks may take extreme action and cut interest rates to nil or even a negative. This would result in a poorer outcome on the 3 months of investment than the Treasurer would desire. The Treasurer has a talk with his bank, and they offer a Forward Rate Agreement (FRA) at 1% for a cost of 0.1% of the invested value. The Treasurer then looks to the open market and sees that for a premium costing 25,000 he could potentially secure 40 3- month Sterling Futures for the period priced at 99.00. Each of the 40 contracts is for a nominal 500,000 and the tick value is 12.50 per tick.

A. You are to mathematically show the underlying profit and loss of the Forward Rate Agreement (FRA) and Interest Rate Future hedging transactions proposed by Barry Plc in the following scenarios; (1) the interest rate declines to zero, and (2) the interest rate increases to 2%.

B. Which is better for Barry Plc for the period? The FRA or the Future?

C. At what starting price or higher could Barry Plc expect to sell a 10 year bond with redemption value of 100 and an annual coupon rate of 3% if the current market expectations is a 1% yield for a bond of this type of bond for this type of company?