Question

The financial manager of Media Limited expects that the company will have surplus funds of $2.3 million in one month's time. She intends to use the funds to buy bank bills. Concerned that interest rates may fall, the manager decides to hedge and enters into 90-day bank bill futures contracts at 93.50. One month later, the funds are invested and the futures position is closed out at 92.95. Using the above data decide how many futures contracts should be bought or sold and calculate the profit or loss on the futures transactions. (Ignore margin calls and transaction costs.) $2623.94 profit

$3017.53 profit

$3017.53 loss

$2623.94 loss

Answer 1

Solution:

The 90 days bank accepted bills futures contract is based on a bill with a face value of $1 million so the company will need to buy 2 contract.The quoted price of 93.50 corresponds to 6.5%(100-93.50) so the sale price is;

=1,000,000/[1+(0.065*90/365]

=984,225.43

When the company sells to close out its position,the yield is 7.05%,so the price is

=1000,000/[1+(0.0705*90/365)]

=982,913.46

and the company's loss on futures loss is;

=(984,225.43-982,913.46 )*no. of contracts

=1311.97*2=2623.94

Thus correct answer is $2623.94 loss