Question

3. In March, Fiona Fox, Treasury Manager for the Global Gathering

Corporation, and plans on purchasing $1,000,000 of 91 day T-bills for the

company’s short-term portfolio when that amount of cash comes in to the

company in May. At this time, the 91 day T-bill discount rate is 1.670%,

implying a price of $1,000,000 [1 –(.0167 x 91/360)] = $995,778.61.

At this time, on the CME Group website, the May 2018 futures price for 90-

day Eurodollar CD, the IMM index price is quoted as 97.695 (implying a

discount rate of 100% - 97.695% = 2.305%), and each contract is for $ 1

million, implying a contract price of $1,000,000 [1 – (.02305 x 90/360)] =

$ 994,237.50.

a. Suppose Fiona wants to hedge her spot position against a fall in rates, that

would make the purchase of the T-bills more expensive in May with a

purchase of 1 Eurodollar CD contract, what position should she take short

or long, and explain why?

Long or Short Position ___________

Explain why __________________

b. Suppose in May, the T-bill discount rate falls to 1.47% and the Eurodollar

CD discount rate falls to 2.105%, what is the gain or loss on the spot

position and on the futures position, and the net hedging result?

Spot Gain or Loss ____________

Futures Gain or Loss _________________

Net Hedging Result _______________________