Mod. 5: Hedging with Interest Rate Futures (Chapter 8, pp. 191 to 193).

[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 October, a bank short-term investment manager has $1 million in 90 day T-bills on its balance sheet that it plans to sell in December for liquidity purposes, and is worried about interest rates rising in the next few months, which would cause the value of the T-bills to fall. The current (spot) discount yield is 1.60% (i.e. a Discount % price of 98.4%) for a 90-day T-bill.

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

T-bill Price in Dollars _____________________

On the CME Group website, a December 2019 Eurodollar Futures contract gives a price of 98.10% (i.e., a discount yield of 1.9%) for a $1 million, 90 day Eurodollar Futures contract.

b. What is the contract price for the Eurodollar Futures Contract is dollars?

Eurodollar Futures Price in Dollars ___________________

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