Part 1.

Given the following zero rates, calculate the forward rates for 1, 1.5, and 2 year.

Maturity (years)	Zero rate
0.5	4.5
1.0	4.75
1.5	5.2
2.0	5.75

Part 2.

Explain short selling.

Give an example of a short selling transaction.

Part 3.

Suppose you are planning to borrow $75.5 million dollars in six months. The loan will be for three months. The current LIBOR rate is 5%. You are concerned about changes in LIBOR.

Part a. Use Eurodollar futures to construct a hedge that will protect your cost of borrowing.

Part b. Show the cost of borrowing if after six months, LIBOR = 5%, 4%, and 6%