You are the finance manager of Play Safe Ltd. On 28 August, Play safe’s board of

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You are the finance manager of Play Safe Ltd. On 28 August, Play safe’s board of directors decides that in 7weeks time, Play safe will issue nine bank bills each with a face value of $100,000 and a term of 120 days. In its planning the Board assumed that yields will not change from their current levels. On 29 August you are told to arrange a hedge for PlaySafe . On that date you are given the following data: Bank bill yields: 90 days: 13.82 per cent per annum 120 days: 14.07 per cent per annum Bank bill futures September: 86.10 December: 85.85 You arrange an appropriate hedge. Several months later you are asked to write a report on your hedging performance, including reasons for any net gain or loss made. Consulting the records, you discover that the bills were issued on time at a rate of 15.37 per cent per annum and the futures contracts were reversed at 84.65. At that time the 90day bill rate was 15.13 per cent per annum. Write a report on the outcome of the gains or losses made from your hedge addressing the following questions: The (gross) dollar shortfall that Play Safe Ltd would have faced if a futures contract had not been entered into The gain made on the futures contract The net dollar shortfall An explanation of (3) in terms of basis risk and specification differences A brief assessment of the effectiveness of the hedge Relevant calculations must be shown

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