The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $123,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 12.30 percent. If they increase to 13.50 percent, assume the value of the contracts will go down by 15 percent. Also, if interest rates do increase by 1.2 percent, assume the firm will have additional interest expense on its business loans and other commitments of $102,500. This expense, of course, will be separate from the futures contracts.

b-2. What percent of this $102,500 cost did the treasurer effectively hedge away?

Note: Input your answer as a percent rounded to 2 decimal places.

Answer rating: 100% (QA)

To solve this problem we need to calculate the gain or loss from the futures contracts and the perce... View the full answer