National Bank intent to issue a 180 day banker accepted bill amounting to USD50.0 million in three months. As the interest rate is expected to increase, National Bank decides to use 180 day banker accepted bill futures contracts to hedge against the interest rate exposure. The banker accepted bill futures contracts are currently traded at 93.60. Current rate quoted is 6.1% per a1111t11n. six months later, when the bank closes out its futures position, the contracts are trading at 92.80 and the banl<. issues banker accepted bill at a rate of 7.30% per annum.

(Contract size= USD 1,000,000/contract.)

(a)Determine the number of banker accepted bill future contract to be used in this hedging process and indicate which position should be taken in the futures market.

(b)Show the strategies taken by the manager to hedge the interest rate exposure and calculate the effective interest cost to the benk on this short-term debt (show all calculations).

(c) Is this a perfect hedge? Why?