On 10th January 2022, sterling money market rates were as follows:

91 day interest rate spread 0.84% - 0.88%182 day interest rate spread 0.91% - 0.95%

sterling Three month interest rate futures 500,000 (CME)

Price

March (delivery day 16th March) 99.0257

June (delivery day 18th June) 98.8657

September (delivery day 21st September) 98.8057Assume that day count convention for transaction in UK money markets is actual days/365

The delivery days for the futures contracts are 16th March, 18th June, and 21st September.

a) MNS Plc plans to deposit 55,800,000 for 91 days, starting 91 days from 30th January. Critically discuss the terms of a money market hedge and estimate the forward rate the the company could establish via those money market transactions.

b) Assume MLC Plc had entered a Forward Rate Agreement with an investment bank to fix the forward deposit rate at the level implied by money market hedge. Show how the FRA is settled if, on the settlement date, LIBOR is 1.46%

c) Critically devise a hedge of the interest rate risk using sterling futures and assess how well it works if three month LIBOR in 91 days is 1.47% and futures contract price is 99.51.

d)Critically discuss the factors that MNZ need to consider in deciding:

whether to hedge the deposit rate on the forthcoming cash flow

whether to enter FRA or trade futures contracts to hedge the deposit rate