Mariposa Industries has $5 million of floating rate bonds that mature in 3 years and is concerned about interest rates rising in the next year. It wishes to hedge this risk with an interest rate futures contract. A one year Eurodollar futures contract is priced at 97.2.
a. What is the current interest rate?
b. Should the Treasurer buy or sell a futures contract?
c. If the interest rate in one year is 3.2% what would be the gain or loss on the futures contract in percent and dollar amount (notational of $5 m)?