Q 1(a) [10 Marks]

On 30th July, three-month sterling futures are quoted as follows:

September 94.45

December 94.30

March 94.22

The futures contracts have a notional value of 500,000.

A forward rate agreement is available at 6%.

Issue plc is looking to raise 10 million floating rate loan at the beginning of

December for three months. The company is expecting to borrow at a rate of 6

percent, but it is concerned that the interest rate may rise. Therefore, the company

wishes to reduce this interest rate risk using a forward rate agreement (FRA) or

interest rate futures.

Required:

Show the profit/loss on the underlying and the derivative under each strategy if

market interest prices fall to 5.5 percent, and if they rise to 7 percent.