QUES 2.1 INTEREST RATE FUTURES Omniown Company wishes to borrow 5,000,000- for six months. The corporate...

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QUES 2.1 INTEREST RATE FUTURES Omniown Company wishes to borrow 5,000,000- for six months. The corporate treasurer of Omniown Co. expects interest rate to increase by 2% during the next three months and has decided to hedge the interest rate risk using interest rate futures. March sterling three-month time deposit futures are currently priced at 86.25. Futures prices are expected to increase by 2%. The contract size is 500,000 and the minimum price movement is one tick (the value of one tick is 0.01% per year for the contract size). REQUIRED: a) Compute the following: 0 The magnitude of interest rate risk The Tick Value Expected Gain per Contract The Number of Contracts Needed b) Show the effect of using the futures market to hedge against interest rates movements: If interest rates increase by 2% and the futures market price also increases by 2%. If interest rates increase by 2% and futures market increases by 1.5% If interest rates fall by 1% and futures market declines by 0.75%. In each case estimate the hedge efficiency. Ignore taxation and time value of money QUES 2.1 INTEREST RATE FUTURES Omniown Company wishes to borrow 5,000,000- for six months. The corporate treasurer of Omniown Co. expects interest rate to increase by 2% during the next three months and has decided to hedge the interest rate risk using interest rate futures. March sterling three-month time deposit futures are currently priced at 86.25. Futures prices are expected to increase by 2%. The contract size is 500,000 and the minimum price movement is one tick (the value of one tick is 0.01% per year for the contract size). REQUIRED: a) Compute the following: 0 The magnitude of interest rate risk The Tick Value Expected Gain per Contract The Number of Contracts Needed b) Show the effect of using the futures market to hedge against interest rates movements: If interest rates increase by 2% and the futures market price also increases by 2%. If interest rates increase by 2% and futures market increases by 1.5% If interest rates fall by 1% and futures market declines by 0.75%. In each case estimate the hedge efficiency. Ignore taxation and time value of money