1. Stan has sold a futures contract on Treasury bills that specified a price of 97.42. When the settlement date arrived, Stan closed out his position by purchasing a Treasury bills futures contract for 98.39. Ignoring transaction costs, determine Stan’s profit or loss.

2. Did Stan anticipate interest rates to increase or decrease when he sold his futures contract? What did he anticipate would happen to T-bill prices?

(B) Assume that American First Bank (AFB) has more rate-sensitive assets (in terms of dollars) than rate-sensitive liabilities.

1. Would AFB be more likely to be adversely affected by an increase or a decrease in interest rates? Explain why.

2. Should AFB purchase or sell interest rate futures contracts in order to hedge its exposure? Explain.

3 .Would a long hedge be more appropriate than a short hedge for AFB? Why or why not?