Interest Rate Futures As part of its cash management activities, Greenstein Corp. regularly invests in 91-day Treasury bills. It purchased $1,000,000 face value of these bills on June 1 and, fearing lower interest rates when it rolls over these short-term investments, Greenstein purchases $1,000,000 face value Treasury bill futures at 96 to be delivered in 91 days and makes a $10,000 margin deposit.
Required
a. Prepare the journal entries made on June 1, on the June 30 reporting date when the Treasury bill futures are selling at 97, and on August 30 when the old Treasury bills mature and the new ones are delivered. On August 30, Greenstein's futures contract is selling at 97.5.
b. Assume the new Treasury bills cost $993,750. Use calculations to show how the hedge enables Greenstein to report a 4 percent annualized return on the new Treasury bills even though they currently yield 2.5 percent annually.