A bank is considering issuing $20 million in short-term deposits for a term of 30 days. Currently annual interest rates are 0.21 percent on such deposits, however the bank expects rates on comparable deposits to rise to 0.36 percent during the 30-day period. As a result the bank plans to hedge its position by selling $20 million 2-year Treasury Notes futures contract currently at an index price of 92. Interest rates rise as expected and the bank offsets its position by buying futures contract at 91.95.

a. Calculate the change in dollar interest cost of issuing the deposits if interest rates rise. (5 points)

b. Calculate the pre-tax gain or loss resulting from the futures position. (19 points)

c. Calculate the overall combined pre-tax gain or loss from the cost of issuing deposits and the futures contract. (3 points)

Answer rating: 100% (QA)

a Initial dollar interest cost 021 20 112 3500 New dollar interest cost 036 20 112 6000 Change ... View the full answer