XSIF Trust is planning to invest $10 million for one year. As an alternative to a one-year fixed-rate note paying 8.5%, XSIF is considering a synthetic investment formed by investing in a Second National Bank one-year floating-rate note (FRN)

paying LIBOR plus 100 basis points and taking a position in a Eurodollar futures strip. The FRN starts on 12/20 at 9% (LIBOR = 8%) and is then reset the next three quarters on 3/20, 6/20, and 9/20. On December 20th, the Eurodollar futures contract expiring on 3/20 is trading at 91 (IMM index), the contract expiring on 6/20 is trading at 92, and the contract expiring on 9/20 is trading at 92.5; the time separating each contract is .25/year and the reset dates on the floating-rate note and the expiration dates on the futures expiration are the same.

a. Explain how XSIF Trust could use a strip to lock in a fixed rate. Calculate the rate XSIF could lock in with a floating-rate note and Eurodollar futures strip.

b. Calculate and show in a table XSIF’s quarterly interest receipts, futures profits, hedged interest return (interest plus futures profit), and hedged rate for each period (12/20, 3/20, 6/20, and 9/20) given the following rates: LIBOR

= 9.5% on 3/20, LIBOR = 9% on 6/20 and LIBOR = 7% on 9/20.