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You are a risk-management expert at a Canadian bank. A major client of your bank...

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Accounting

You are a risk-management expert at a Canadian bank. A major client of your bank seeks your advice on how to hedge against interest rate risk of financing a major project to be launched in three months. The project will require installation of a data processing equipment requiring $20 million initial capital outlay to be financed through a 10-year bond issue. The current market interest rate for such bond issues is 12 percent. But your client is afraid that the interest rate could increase by 2 percentage points in the next three months. The current three-month forward price of 18-year, 9% government bonds is $782.51.

What advice would you give to your client? Support your answer with relevant calculations.

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