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You second client acts on behalf of a large Australian company who is looking to invest in a major project at the end of the year. This client knows that the company will need to borrow $20,000,000 in December for 3 months through debt instruments and is concerned about an increase in interest rates between now and then. They would like you to set up an interest rate hedge to protect them from any such increases in interest rates. The contract will be established today (19^th February 2021) and should be in place until at least December 19^th, 2021.

Step 1 Choose an appropriate futures contract.

A snapshot of BAB futures prices as of February 19^th is provided. Determine which contract should be chosen stating the day of expiry for the contract. Determine the price and yield of the appropriate contract.

Step 2 Determine the number of futures contracts required.

Determine the initial value of the futures contract and the number of contracts that should be purchased to hedge this position. Determine whether they should be buy or sell positions.

Step 3 Calculate the total cost of raising the funds for the company under two (2) potential future scenarios.

Determine the total cost of raising funds for your client assuming two different potential future outcomes: 1) an ending BAB price of 99.95 and 2) an ending BAB price of 99.85.

BAB Futurils Contracts EXPIRY DATE BID OFFER LAST TRADE CHANGE VOLUME PREVIOUS SETTLEMENT O Mar 21 99.980 99.990 99.990 As of 19/02/21 537 99.990 As of 18/02/21 Jun 21 99.970 99.980 1107 99980 As of 19/02/21 99 980 As of 18/02/21 Sep 21 99 950 99.960 V 0.01 162 99 950 As of 19/02/21 99.960 As of 18/02/21 Dec 21 Dec 21 99.930 99.940 70.01 V 0.01 99.930 As of 19/02/21 1230 99.940 As of 18/02/21 Mar 22 99 910 99.920 V 0.01 2714 99.910 As of 19/02/21 99.920 As of 18/02/21 Jun 22 99.880 99.890 99.890 As of 19/02/21 3519 99.890 As of 18/02/21 Sep 22 99.840 9,840 99.850 V 0.02 2500 99.840 As of 19/02/21 99 860 As of 18/02/21 Dec 22 99 780 99.790 99.790 V002 4787 99.810 Current 90 day bank bill rate 0.0107% 24 hour delayed BBSW rates TENOR BID ASK MID METHOD YIELD RANGE (BPS) 1 MONTH 0.0550 -0.0450 0.0050 NBBO 2 MONTH 0.0600 -0.0400 0.0100 NBBO 3 MONTH 0.0607 -0.0393 0.0107 WLSR 4 MONTH 0.0680 -0.0320 0.0180 WLSR 5 MONTH 00700 0.0300 0.0200 NBBO 6 MONTH 0.0729 -0.0271 0.0229 WLSR As of 23/02/2021

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