Working for the Treasury department of A company your company is expected to rollover an existing $1 million bill debt facility in three months and is concerned that interest rates may rise before the rollover date. You are asked to design a hedging strategy to mitigate the interest rate risk exposed to the company. You are given the following information about todays and 3-month times Bank Accepted Bills (BABs) and bill futures contracts: Todays data: 90-day BABs rate is 5.00% per annum; SFE bill futures contract quoted at 94.00. Data in three months time: 90-day BABs rate is 7.00% per annum; SFE bill futures contract quoted at 92.00. Answer the following 4 questions and show your calculations.

a) Should your company buy, or sell, a futures contract today? And why?

b) What is the price of the futures contract today?

c) When your company closes out its futures position, will your company make a profit or loss, and what will be the dollar amount?

d) Calculate the effective cost of funding for your company in three months time.