Pico plc has borrowed heavily in euros and is worried about increasing

interest rates in the eurozone. The Finance Director suggests that Pico

plc should sell futures on French bonds (known as OATs or Obligations

Assimilables du Trsor).

a. Explain why selling a futures contract on French bonds would

reduce the effect of an increase in euro interest rates.

(3 marks)

b. Pico sells a futures contract on bonds for 1,010 calculate the daily

payments and receipts on the futures contract given the following

bond prices:

Day 1 Day 2 Day 3 Day 4 Day 5

1,010 1,005 1,001 1,006 1,009

(