Question

Paus in June, you are expecting to buy $10m 3-m Treasury bills in September, but is concerning that the Treasury bill price could go up. The 91-day Treasury bill today is trading to yield 5.50 % , but is expected to decline to 4.8 % in September. As rates are will be rising, a hedge is needed. (A) If you don't hedge, what will be the opportunistic loss is September when you purchase the T-bills? (B) If you hedge by using 3-m Treasury bill futures, what you should do today? What will be the net hedging result? Assuming that T-bill futures are discounted at 5.40% today and will fall to 4.9% ( 10 points) falling, the T-bill price that you have to pay

Answer 1

Considering $100 as face value, price of T-bill on June will be $98.63 and in September the price will be $98.81. Calcualtion given below:

B A E G H Issue Date Jun-19 Issue Date Sep-19 Maturity Dec-19 Maturity Sep-19 4.80% yield yield 5.50% =PRICE(E1,E2,0,E3,100,1,1) Price 98.63265 Price PRICE(settlement, maturity, rate, yld, redemption, frequency, [basis])

A B C D E Issue Date Jun-19 Issue Date Sep-19 Maturity yield Sep-19 Maturity Dec-19 yield 5.50% 4.80% Price 98.63265 Price 98.81744

A) So, your opportunity loss =(98.81-98.63)*10000000/98.63=$18734.7

B) So, hedge the position you need to buy T-bill future.

If you buy T-bill future then price of T-bill future will be $98.65 in June to $98.79 in September. Calculation given below:

A B C D Issue Date Jun-19 Issue Date Sep-19 Maturity Sep-19 Maturity Dec-19 yield 5.40% yield 4.90% Price 98.65718 Price 98.7931 LLJ

A B D F G Issue Date Jun-19 Issue Date Sep-19 Maturity Sep-19 Maturity Dec-19 yield yield 5.40% 4.90% =PRICE (B1,B2,0,B3,100, 1,1) Price 98.7931 PRICE(settlement, maturity, rate, yld, redemption, frequency, [basis]) (F

So, in this case your profit will be= (98.79-98.65)*10000000/98.65=$13776.9

So, your net hedging result= (-18734.7+13776.9)=$-4957.8