Today is May 1. Your firm purchased $15,000,000 face value of 180 day commercial paper today for a price of $14,550,000. You will need to liquidate the position in 120 days and you believe interest rates may move against you in the meantime and you decide to use euro$ futures to hedge the position. a) How many futures contracts should you use to fully hedge and should you buy or sell the futures contracts today if the September euro$ futures quote is at 98.55 and the December euro$ futures quote is at 97.35? Should you use the September or the December contract? b) One hundred and twenty days later, at the end of August the commercial paper is priced at $14,800,000 and the futures price quote for the September euro$ futures quote is at 98.95 and the December euro$ futures quote is at 98.25. What is the total dollar gain or loss on your futures position? What is the percentage interest rate earned on the commercial paper investment expressed as an effective annual rate or EAR including the futures hedge? (Annualize the HPR with compounding, use a 365 day year to annualize over the appropriate period.) c) Using the results in b), find the EAR on the investment without the futures hedge. As in b), use a 365 day year to annualize. How many basis points were gained or lost by hedging? In this case were you glad you hedged? Explain. Please show all working!
Today is May 1. Your firm purchased $15,000,000 face value of 180 day commercial paper today for a price of $14,550,000. You will need to liquidate the position in 120 days and you believe interest rates may move against you in the meantime and you decide to use euro$ futures to hedge the position. a) How many futures contracts should you use to fully hedge and should you buy or sell the futures contracts today if the September euro$ futures quote is at 98.55 and the December euro$ futures quote is at 97.35? Should you use the September or the December contract? b) One hundred and twenty days later, at the end of August the commercial paper is priced at $14,800,000 and the futures price quote for the September euro$ futures quote is at 98.95 and the December euro$ futures quote is at 98.25. What is the total dollar gain or loss on your futures position? What is the percentage interest rate earned on the commercial paper investment expressed as an effective annual rate or EAR including the futures hedge? (Annualize the HPR with compounding, use a 365 day year to annualize over the appropriate period.) c) Using the results in b), find the EAR on the investment without the futures hedge. As in b), use a 365 day year to annualize. How many basis points were gained or lost by hedging? In this case were you glad you hedged? Explain. Please show all working!
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Today is May 1. Your firm purchased $15,000,000 face value of 180 day commercial paper today for a price of $14,550,000. You will need to liquidate the position in 120 days and you believe interest rates may move against you in the meantime and you decide to use euro$ futures to hedge the position.
a) How many futures contracts should you use to fully hedge and should you buy or sell the futures contracts today if the September euro$ futures quote is at 98.55 and the December euro$ futures quote is at 97.35? Should you use the September or the December contract?
b) One hundred and twenty days later, at the end of August the commercial paper is priced at $14,800,000 and the futures price quote for the September euro$ futures quote is at 98.95 and the December euro$ futures quote is at 98.25. What is the total dollar gain or loss on your futures position? What is the percentage interest rate earned on the commercial paper investment expressed as an effective annual rate or EAR including the futures hedge? (Annualize the HPR with compounding, use a 365 day year to annualize over the appropriate period.)
c) Using the results in b), find the EAR on the investment without the futures hedge. As in b), use a 365 day year to annualize. How many basis points were gained or lost by hedging? In this case were you glad you hedged? Explain.
Please show all working!
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