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Question 1: Today is April 2017. Elle will need to borrow $4,000,000 for 90 days this coming October. Interest rate futures contracts for October exercise are quoted at 88.25. The notional contract value is $1,000,000. Elle decides to hedge her exposure. The 90-day interest rate turned out to be 10.5% in October.
Required: Demonstrate how Elle's hedging strategy locks her borrowing rate at 11.75% regardless of the spot interest rate in October.
Question 2: Mickie often speculates on interest rates and she forecasts that there will be a rise in short term interest rates in 4 months' time. She intends to use 10 year Treasury bonds, with face value of $100,000. This bond pays semi-annual coupons with a 4 percent coupon rate. Her usual position involves 5 contracts. Today she initiates a speculative position with 2 bond futures contracts at 98.40 and another 3 contracts at 96.80 one month later.
Calculate Mickie's trading gains / losses after 4 months when she squares her positions at 99.00.Your answer must include an explanation on the futures position that she should take to capitalize on her forecast.
Rory, Marsha & Chris have a small Motor Vehicle Repair Garage. They have been in business together for the last 6 years. They would like to expand their business as trade has been growing over the last 3 years. In order to expand they need to take..
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