a) In this case, Starlight Ltd has a definite borrowing requirement that it wishes to hedge. Therefore, a futures hedge is appropriate as it locks in a rate. The company is exposed to rates from June to December, and the futures contract is based on 3-month rates from the delivery date. Therefore, the company should sell 3 June futures contracts and 3 September contracts.

b) In this situation, BrightFuture Ltd does not know whether it will need to borrow as this will depend on whether it wins the tender. For this reason, an option hedge is a better alternative as it will give the ability to lock into an interest rate but should the company’s bid be unsuccessful, the option can lapse or be sold.

c) In this case, either a futures or options hedge could be used. But the contracts would create an offsetting position that would be effective. Horizon Enterprises is concerned about falling interest rates affecting its deposit returns. To hedge this, the company should buy futures contracts to lock in the current interest rate or use call options to benefit from potential rate increases while protecting against declines. Given the deposit is for one year with 3-month rates, buying 7 futures contracts (for €7 million) for each relevant delivery month (September, December, March, June) or equivalent call options would be appropriate.