In October, Penny Bear, Treasury Manager for the Winter Den Company plans on selling $1,000,000 of 3-month day T-bills in December. At this time, the 3-month day T-bill discount rate is 2.70%, implying a discount market value of $1,000,000 {1 –[(.027)(90/360)]} = $993,250. Penny is concerned about rates rising (i.e. T-bill prices falling) in December. At this time, on the CME Group website, the December 2018 futures contract price for 90-day Eurodollar CD, the IMM index price is quoted as 96.76 (implying a discount rate of 100% - 96.76% = 3.24%), and each contract is for $ 1 million, implying a contract price of $1,000,000 {1 – [(.0324)(90/360)]} = $ 991,900.

a. Suppose Penny wants to hedge her spot position, what position should she take short or long, and explain why? Long or Short Position ___________ Explain why __________________

b. Suppose in December, the spot T-bill discount rate rises to 4.20% and the Eurodollar CD discount rate rises to 4.74%, what is the gain or loss on the spot position and on the futures position, and the net hedging result? c. Spot Gain or Loss _____________ Futures Gain or Loss _________________ Net Hedging Result __________________

Answer rating: 100% (QA)

a Treasury manager may use Eurodollar future to hedge against changes in short term interest rates T... View the full answer