It is September 2013, International Investment Bank intents to issue a 180-day $500 million bankers accepted bill in March 2014. Current rates in the physical market are 15.15% and march 2013 Bank Bills futures are trading at 84.50. The treasurer is concerned that interest rates may move against him and wishes to hedge his position using futures. One contract is equal to $10.0million.

In March 2013, interests have risen to 18.00% in cash market and March 2014 futures are trading at 16.50%.

(a) Identifying what type of position the bank should take to hedge, & Once a hedge is in place, what other risks remain?

(b)

(i) The value of the March 2014 futures contract in September 2013

(ii) The futures profit in 1March 2014

(iii) The net revenue flow in March 2014 cash market.

(e) What is the effective rate on the above situation?