Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The s

Midland
Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The
small chemical company needs to borrow is $650000. The bank offers a
rate of 8 percent with a 20 percent compensating balance requirement or
as an alternative 11 percent with additional fees of $5500 to cover
services the bank is providing. In either case the rate on the loan is
floating (changes as the prime interest rate changes). The
loan would be for one year. Scenario 1: Then bank offers a compensating
balance loan: Interest Rate 9.00% Compensating balance requirement 20% Scenario 2: The bank offers a fee-added loan: Interest rate 11.50% Additional Bank $5575In
order to hedge against the possible rate increase described in part e
the Midland Chemical Co. decides to hedge its position in the futures
market. Assume it sells $500000 worth of 12-month futures contracts on
Treasury bonds. One year later interest rates go up 2.5 percent across
the board and the Treasury bond futures have gone down to $479000. Has
the firm effectively hedged the 2.5 percent increase in interest rates
on the bank loan of $600000? Determine the answer in dollar amounts.