Question 4 A small bank is planning to issue A$20 million in 90-day negotiable certificates of deposit (NCDs) in three months. Forecasts of interest rate movements over the next few months are mixed, so the manager decides to use 90-day bank-bill futures contracts to hedge against the exposure. The bank-bill futures contracts are currently traded at 93.67. The manager estimates that the rate currently required on the NCDs is 6.1% per annum. Three months later, when the bank closes out its futures position, the contracts are trading at 92.80 and the bank issues NCDs at a rate of 7.30% per annum. (Contract size = $1,000,000/contract.) (a) Calculate the effective interest cost to the bank on this short-term debt (show all calculations). (b) Is this a perfect hedge? Why? Question 4 A small bank is planning to issue A$20 million in 90-day negotiable certificates of deposit (NCDs) in three months. Forecasts of interest rate movements over the next few months are mixed, so the manager decides to use 90-day bank-bill futures contracts to hedge against the exposure. The bank-bill futures contracts are currently traded at 93.67. The manager estimates that the rate currently required on the NCDs is 6.1% per annum. Three months later, when the bank closes out its futures position, the contracts are trading at 92.80 and the bank issues NCDs at a rate of 7.30% per annum. (Contract size = $1,000,000/contract.) (a) Calculate the effective interest cost to the bank on this short-term debt (show all calculations). (b) Is this a perfect hedge? Why