$($LO$8-5)$ The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five

Treasury futures contracts at $$138,000$ per contract. It is July, and the contracts must be closed out in December of this year. Long$-$

term interest rates are currently $13\mathrm{.}3$ percent. If they increase to $14\mathrm{.}5$ percent, assume the value of the contracts will go down by $5$

percent. Also, if interest rates do increase by $1\mathrm{.}2$ percent, assume the firm will have additional interest expense on its business loans

and other commitments of $$53,000.$ This expense, of course, will be separate from the futures contracts.

a$.$ What will be the profit or loss on the futures contract if interest rates increase to $14\mathrm{.}5$ percent by December when the contract is

closed out?

b$.$ Explain why a profit or loss took place on the futures contracts.

c$.$ After considering the hedging in part $a,$ what is the net cost to the firm of the increased interest expense of $$53,000?$ What

percentage of this $$53,000$ cost did the treasurer effectively hedge away?

d$.$ Indicate whether there would be a profit or loss on the futures contracts if interest rates dropped.