Explain and demonstrate how BAB futures contracts can be used to hedge a floating-rate borrower's exposure to interest rate risk.Assume that the borrower plans to issue 90-day bank bills with a face value of $80 million under a two-year bill facility commencing next September, that September BAB futures are trading at 94.75, and that the spot 90-day bill rate in September is 5.40%.

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The Answer of Explain and demonstrate how BAB futures contracts can be used to hedge a floating-rate borrower's exposure to interest rate risk.Assume that the borrower plans to issue 90-day bank bills with a face value of $80 million under a two-year bill facility commencing next September, that September BAB futures are trading at 94.75, and that the spot 90-day bill rate in September is 5.40%.

Explain and Demonstrate How BAB Futures Contracts Can Be Used