In mid-December, a bank Treasurer projects that loan demand will require a $10 million borrowing on March 15. The contractual loan rate is 125 basis points over LIBOR. As of December 15, the 3-month LIBOR rate was 8.375 percent and the March Eurodollar futures rate was 11.85 percent (price 88.15). The Treasurer is concerned that interest rates may rise between December and March. The projection for the future is that on March 15, the 3-month LIBOR rate would be 11.125 percent, and the Eurodollar futures rate would be 14.75 percent (price 85.25).

a. State what kind of hedge would he take and why.

b. Compute the firm’s actual interest cost in dollars.

c. Compute gain or loss in the futures market after describing the transactions.

d. Calculate effective annualized interest cost.