Section 6.5 of your textbook provides an example of a hedge of a floating rate loan with futures contracts similar to BAX of the Montreal Exchange. We will try to construct this type of hedge for a floating rate loan of $ 25 million, which begins January 2 and ends April 3. The interest rate is changed every month and is equal to the bankers' acceptance rate due 1 month + 0%. A similar strategy is given as an example in your textbook (p. 145-147). We will develop a strategy similar to that described in your textbook to hedge this loan.

1. a)Explain why we should hold short positions infuturesin order to establish the hedge.