This is the question:
- The CIO of a Canadian private equity company wants to lock in the interest on a three- month “bridge” loan his firm will take out in six months to complete an LBO deal. He buys the relevant interest rate futures contracts at 98.05. In six- months’ time, he initiates the loan at 2.70% and unwinds the hedge at 97.30. The effective interest rate on the loan is:
- A 0.75%.
- B 1.95%.
- C 2.70%.
In the answer it says that he is making a gain on the futures contract? How is that possible, to me it seems as he buys it at 98.05 and sell it at a lower price of 97.30?