You are the senior manager of a chartered bank and have


Question: You are the senior manager of a chartered bank and have been approached by one of the bank's important clients. The client is seeking advice on how to handle an unwanted interest-rate exposure attributable to a major capital expenditure commitment that is about to be finalized. Specifically, major equipment is to be installed with payment of $15 ,000,000 due in 6 months. All $15,000,000 is to be raised at that time through 20-year debt. The current interest rate on such debt is 12 percent, but the client believes that interest rates could increase by 2 percentage points within the next 6 months. The client has asked you to illustrate numerically how interest-rate futures might be used to limit exposure. It was agreed that the explanatory numerical illustration could ignore taxes and transaction costs.

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Finance Basics: You are the senior manager of a chartered bank and have
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