A banker's acceptance is a zero-coupon bond issued by a bank, with the time from issue to maturity usually being less than one year. In November 2005, a corporate treasurer expects that the company will be receiving a payment of 1,000,000 in two months (January) and plans to invest in a 3-month (1⁄4-year) investment at that time. The treasurer wishes to hedge the investment rate that can be obtained when the investment will be made in two months and takes a long position in one 3-month banker's acceptance futures contract (1,000,000 contract amount) with maturity in March 2006.

When the futures contract is entered today, the futures price is quoted at 94.00. In two months (January), when the 1,000,000 is received, the treasurer sells the futures contract. For each of the following scenarios, find the 3-month net return obtained for the 3 months following the receipt of the 1,000,000 that will be invested in January.

a) months from now, the 3-month investment rate is 6.5% (convertible quarterly) and the March futures contract price is 93.60.

b) 2 months from now, the 3-month investment rate is i% (convertible quarterly) and the March futures contract price is 100 - k.

Answer rating: 100% (QA)

To hedge the investment rate the corporate treasurer took a long position in one 3month bankers acce... View the full answer