IR futures question

CFA Level III
#1
  • 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%.

answer is B. Why though? When you sell an interest rate future you are lending money at that rate. So you are lending money at 1.95% but the IR you actually ended up borrowing at 2.7% thereby 0.75% is the effective interest rate. What am I missing here?

#2

These aren’t interest rate futures contracts; they’re bond futures contracts.

Another miss for the curriculum.

#3

@S2000magician thank you sir.