User

Nyasaka plc has borrowing of GBP$100$ million on which it pays three$-$month $$LIBOR

$+2$ per cent. Mr Tuntufye Mwaigomole, The Senior treasurer$$s view is that interest

rates will rise before the next rate fixing on $1$st June. She decides to hedge the

position with futures contracts.

The date now is now $11$th March; the price of June futures is given in the FT extract

$($the exchange has a total spread of $0\mathrm{.}04$ on the rate quoted in the FT$)$ and the current

three$-$month LIBOR is also given in the FT extract below.

Futures information

The contract size is $500,000$

The tick size is $12\mathrm{.}50$

The initial margin is $500.$

i$.$ Draw the risk profile of the company.

ii$.$ Set up the hedge on the $11$th March using the appropriate terminology.

iii. Illustrate the entries in the margin account for the first two days of trading from

the following information:

Closing futures price on $12$th March: $98\mathrm{.}35$

Closing futures price on $13$th March: $98\mathrm{.}30$At $1$st June the following information is available:

The futures contract stands at $98\mathrm{.}60.$

Three months $$LIBOR is $1\mathrm{.}3$ per cent.

Illustrate the cash flows in the money market and the futures market, clearly

setting out the effective return.price at settlement date is $98\mathrm{.}36$