Suppose you have a loan of $10,000,000 outstanding, on which you will have to make a floating-rate interest rate payment on Wednesday, October 11. The interest payment is determined based on a 3-month SOFR rate on that day. You fear that in the next several days the rate might rise. So you hedge yourself by trading 3-month SOFR futures. Assume that you enter the position at the close of day on Wednesday, October 4. a. In order to hedge yourself, which position in 3-month SOFR futures will you take (i.e. buy or sell, contract maturity, and the number of contracts)? b. What is your daily gain or loss on your futures position (on Thursday, Friday, Monday, Tuesday, and Wednesday)? c. What is the interest rate payment that you have to make on Wednesday, October 11, on your $10,000,000 loan? d. What is the net cost to you, taking into account the gains/losses on your hedge, plus the interest payment on the loan (ignore the time value of money)?

Daily Settlements for 3-month SOFR Futures (FINAL) Trade Date: 10/05/2023 (Thursday) Daily Settlements for 3-month SOFR Futures (FINAL) Trade Date: 10/09/2023 (Monday) Daily Settlements for 3-month SOFR Futures (FINAL) Trade Date: 10/11/2023 (Wednesday) 3-month SOFR rate (90-day average)