3. Mod. 5: Hedging with Interest Rate Futures

[Hints: $ Price for T-bills and Eurodollar Futures:

$ Price = $ Amount {1 [(d x n)/360]}

where d = discount yield as a fraction; n = maturity, usually 90 days]

In early September, a bank short-term investment manager has $10 million in 90-day T-bills that the bank plans to sell for its liquidity needs in December, and is worried about interest rates rising (i.e. T-bill prices falling) in the next few months. Suppose at this time in September the current (spot) T-bill rate is a discount yield is 0.40% for a 90-day T-bill.

1. What is the $ price for the $ 10 million of T-bills in dollars?

T-bill Price in Dollars ________

Suppose on the CME Group website, a December Eurodollar Futures contract gives has discount yield of 0.50% for a $1 million, 90-day Eurodollar Futures contract. So the investment manager will get 10 contracts.

2. What is the contract price for the 10 million Eurodollar Futures Contracts

Eurodollar Futures Contracts Price in Dollars ______________

What type of Eurodollar futures contract should be purchased (long or short) and how many contracts should be purchased? Explain why.

Long or Short ____________

Explain Why ______________________________________________

3. Suppose in June the T-bill discount yield goes up by 20 basis points to 0.60%, and the Eurodollar Futures yield goes up by 20 basis points to 0.70%, what is the new dollar price for the 1 mil. T-bills, and what is the new contract dollar price for the Eurodollar Futures Contract?

New T-bill Price in Dollars _______________

New Eurodollar Futures Price in Dollars ____________

4. What is the loss or gain for respectively the T-bills and the Eurodollar Futures contract? What is the net hedging result?

T-bill Position Loss _____Eurodollar Futures Gain_________

Net Hedging Result __________________