It is now 1st April. Your company will receive 8.2 million from a customer in four months time, and it will invest this money for five months until the end of December, when it will be needed for spending on a planned capital project. The company treasurer intends to put the money on deposit for five months when it is received, and expects to be able to invest short term to earn LIBOR plus 0.40%. The treasurer is worried about the risk of a fall in interest rates and wants to secure an effective interest rate for the investment of the 8.2 million for the five-month period. The following information is available: LIFFE 500,000 3 month sterling futures Tick size/ value: (0.0001) / 12.50 September: 95.35 December: 95.70 Futures contracts mature at the end of the relevant month. The current three-month LIBOR rate is 5%. FRA prices 4v5: 4.75 4.70 4v9: 4.57 4.52 5v9: 4.49 4.44 Required (a) Explain how you would lock in an effective interest rate for the income from investing the 8.2 million, using: (1) FRAs (2) Interest rate futures [10 marks] (b) Show what will happen at the end of July if the three-month LIBOR rate is 4.25% and the interest rate exposure had been hedged as indicated in part (a) of the answer, using: (1) FRAs (2) Interest rate futures [12 marks]