Question 2 (20 marks) A corporate treasurer expects to receive 20m in late September, six months from now on. The money will be needed for expansion purposes in December. However in the intervening three months it can be deposited to earn interest. The treasurer is concerned that interest rates will fall from the present level of 8 per cent over the next six months, resulting in a poorer return on the deposited money. A forward rate agreement (FRA) is available at 8 per cent. Three-month sterling interest futures starting in late September are available, priced at 92.00. Note that the value of a tick movement in a three-month sterling interest rate futures contract is 12.5, and the unit of trading for a three-month sterling time deposit is 500,000. Assume: no transaction costs and that a perfect hedge is possible. a) Describe two hedging strategies that the treasurer could employ. (4 marks) b) Show the profit / loss on the underlying asset and the derivative under each strategy if market interest rates fall to 7 per cent, and if they rise to 9 per cent. (16 marks) Question 2 (20 marks) A corporate treasurer expects to receive 20m in late September, six months from now on. The money will be needed for expansion purposes in December. However in the intervening three months it can be deposited to earn interest. The treasurer is concerned that interest rates will fall from the present level of 8 per cent over the next six months, resulting in a poorer return on the deposited money. A forward rate agreement (FRA) is available at 8 per cent. Three-month sterling interest futures starting in late September are available, priced at 92.00. Note that the value of a tick movement in a three-month sterling interest rate futures contract is 12.5, and the unit of trading for a three-month sterling time deposit is 500,000. Assume: no transaction costs and that a perfect hedge is possible. a) Describe two hedging strategies that the treasurer could employ. (4 marks) b) Show the profit / loss on the underlying asset and the derivative under each strategy if market interest rates fall to 7 per cent, and if they rise to 9 per cent. (16 marks)