In March, a bank short-term investment manager has $1 million in 90 day T-bills on its balance sheet that it plans to sell in June for liquidity purposes, and is worried about interest rates rising (i.e. prices falling) in the next few months, which would cause the value of the T-bills to fall. The current (spot) discount yield is 1.10% (i.e. a Discount % price of 98.90%) for a 90-day T-bill. 

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

b. On the CME Group website, a June Eurodollar Futures contract gives a price of 98.10% (i.e., a discount yield of 1.90%) for a $1 million, 90 day Eurodollar Futures contract. What is the contract price for the Eurodollar Futures Contract in dollars? What type of Eurodollar futures contract should be purchased (long or short)? Explain why. 

c.Suppose in June the T-bill discount yield goes up by 20 basis points to 1.30%, and the Eurodollar Futures yield goes up by 25 basis points to 2.15%, 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? 

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

Answer rating: 100% (QA)

a What is the price for the 1 million of Tbills in dollars Price Face value 1 discount yield x matur... View the full answer