On 9 June 2008 XHZ Fashions Ltd Decides That It

On 9 June 2008 XHZ Fashions Ltd decides that it needs to 'lock in' the cost of borrowing
$10 million,which will be required for the 90- day Christmas/New Year trading period from 18 December 2008 until 18 March 2009.Ms Christina Lightfoot,the CFO,of XHZ Fashions Ltd has been looking at using BAB futures contracts as a means to hedge this exposure.She has identified the following contracts trading of the SFE:
• June 2006 BAB futures that expire on 18 June 2008 and are currently priced at 93.70
• December 2008 BAB futures that expire on 18 December and are currently priced at 94.20
• March 2009 BAB futures that expire on 18 March and are currently priced at 94.80
Using this information answer the following questions:
a)Which contracts should Ms Lightfoot use to hedge this position? Why?
b)How many contracts will be required? What type of position will XHZ Fashions have to take in these contracts?
c)What interest rate will XHZ Fashions Ltd be paying on its borrowing if uses BAB futures for the hedge?
d)Demonstrate how the future contracts will have benefited the company if interest rates turned out to be 6.3% on 18 December 2008.