Ican 2025 Strategic Financial Management Question 4

Tolu Ltd (TL) is expecitng to receive $24,000,000 on 1 February 2026, which will be invested unitl it is required for a large project on 1 June 2026. Due to uncertainty in the markets, the company is of the opinion that it is likely that interest rates will lfuctuate signiifcantly over the coming months although it is diiffcult to predict whether they will increase or decrease. TL‟s treasury team wants to hedge the company against adverse movements in interest rates using one of the following derivaitve products: • Forward rate agreements (FRAs) • Interest rate futures • Opitons on interest rate futures TL can invest funds at the relevant inter-bank rate less 20 basis points. The current inter-bank rate is 4.09%. However, TL is of the opinion that interest rates could increase or decrease by as much as 0.9% over the coming months. The following informaiton and quotes are provided from an appropriate exchange on $ futures and opitons. Margin requirements can be ignored. Three-month $ futures, $2,000,000 contract size Prices are quoted in basis points at 100 – annual % yield December 2025: 94.80 March 2026: 94.76 June 2026: 94.69 Opitons on three-month $ futures, $2,000,000 contract size, opiton premiums are in annual %. Calls Puts June December March June Strike December March 0.271 0.342 0.432 0.523 94.50 0.090 0.119 0.520 0.097 0.121 0.289 95.00 0.312 0.417 BK Bank has offered the following FRA rates to TL: 1-7: 4.37% 3-4: 4.78% 3-7: 4.82% 4-7: 4.87% It can be assumed that settlement for the futures and opitons contracts is at the end of the month and that basis diminishes to zero at contract maturity at a constant rate, based on monthly itme intervals. Assume that it is 1 November 2025 now and that there is no basis risk.