Tutorial Questions Topic $8$: Futures

Today's date is ${15}^{th}$ September, $2013$ and you are the financial controller of a

large company. The Board of the company has instructed you to organise a

borrowing of $$7m$ for a period of $9$ months commencing in $9$ months' time.

Specifically, they have told you that the borrowing will be through the issue of

$90$ day bank bills. The concern that both yourself and the Board of the

company have is that bank bill interest rates could rise during the remainder of

$2013$ and into $2014$ and $2015.$ Such a rise would cause an increase in the cost

of the company's borrowing. The Board has instructed you to use futures

contracts to hedge the borrowing. Through answering the following questions,

clearly explain, using the futures contracts available to you today in the table

the follows, how you could lock in the cost of the proposed borrowing.

Today's Date ${15}^{th}$ September, $2013$

$($a$)$ As a borrower, would you be looking to buy or sell these bank bill

futures contracts? Clearly explain your reasoning

$($b$)$ How long is the proposed borrowing for? Which month does the

company want the borrowing to start in$?$ Which month does the

company want the borrowing to finish in$?$ So$,$ which months will you

be buying$/$selling these bank bill futures?

$($c$)$ How many dollars' worth of bank bills is covered by one futures

contract? How many contracts would you need to hedge your $$7m$

borrowing $($in each of the above months you have identified in part

$($b$))?$

$($d$)$ On what date will you be buying$/$selling those futures contracts?

$($e$)$ This question is a summary question that relates to parts $($a$)-($d$).$ In a

practical setting you would telephone your futures broker to set up the

transaction. Explain two things about this telephone call. First, when

would you make the telephone call? Would it be a single telephone call

on a particular day or would it be a series of telephone calls over time?

Second, what would be your instructions to your futures broker? Tutorial Questions Topic $8$: Futures

Today's date is ${15}^{th}$ September, $2013$ and you are the financial controller of a

large company. The Board of the company has instructed you to organise a

borrowing of $$7m$ for a period of $9$ months commencing in $9$ months' time.

Specifically, they have told you that the borrowing will be through the issue of

$90$ day bank bills. The concern that both yourself and the Board of the

company have is that bank bill interest rates could rise during the remainder of

$2013$ and into $2014$ and $2015.$ Such a rise would cause an increase in the cost

of the company's borrowing. The Board has instructed you to use futures

contracts to hedge the borrowing. Through answering the following questions,

clearly explain, using the futures contracts available to you today in the table

the follows, how you could lock in the cost of the proposed borrowing.

Today's Date ${15}^{th}$ September, $2013$

$($a$)$ As a borrower, would you be looking to buy or sell these bank bill

futures contracts? Clearly explain your reasoning

$($b$)$ How long is the proposed borrowing for? Which month does the

company want the borrowing to start in$?$ Which month does the

company want the borrowing to finish in$?$ So$,$ which months will you

be buying$/$selling these bank bill futures?

$($c$)$ How many dollars' worth of bank bills is covered by one futures

contract? How many contracts would you need to hedge your $$7m$

borrowing $($in each of the above months you have identified in part

$($b$))?$

$($d$)$ On what date will you be buying$/$selling those futures contracts?

$($e$)$ This question is a summary question that relates to parts $($a$)-($d$).$ In a

practical setting you would telephone your futures broker to set up the

transaction. Explain two things about this telephone call. First, when

would you make the telephone call? Would it be a single telephone call

on a particular day or would it be a series of telephone calls over time?

Second, what would be your instructions to your futures broker?

$($f$)$What are the yields implicit in the quoted $$prices$$ for the bank bill

futures contracts above?

$($g$)$ If you sold $$7$m face value of bank bills at the June $2014$ futures rate of

$2\mathrm{.}580\%,$ how much money would the company receive on $15$th June

$2014?($ANSWER: $$6,955,750)$ How much would it have to pay back

$90$ days later? $($ANSWER: $$7,000,000)$ Complete a similar calculation

for the other bank bill issues that the company will undertake.

$($h$)$ Use an IRR calculation to determine your overall p$.$a$.$ cost of

borrowing from using futures to hedge your exposure? $($ANSWER:

$0\mathrm{.}68\%$ p$.$p$.,2\mathrm{.}75\%$ p$.$a$.$