Discuss the effect of higher interest rates

Reference no: EM1354763

Mike Lane will have $5 million to invest in five -year U.S. Treasury bonds three months from now. Lane believes interest rates will fall during the next three months and wants to take advantage of prevailing interest rates by hedging against a decline in interest rates. Lane has sufficient bonds to pay the costs of entering into and maintaining a futures position.
a. Describe what action Lane should take using five-year U.S. Treasury note futures contracts to Assume three months have gone by and, despite Lane's expectations, five-year cash and forward market interest rates have increased by 100 basis points compared with the five-year forward market interest rates of three months ago.
b. Discuss the effect of higher interest rates on the value of the futures position that Lane entered into part a.
c. Discuss how the return from Lane's hedged position differs from the return he could now earn if he had not hedged in part a.

Reference no: EM1354763

Questions Cloud

What is an audit program : What is an audit program? Identify two tasks that need to be accomplished in the framework for developing an audit program. What essential information is generally documented in an audit program?

How deep is the ocean at this point : imagine that you have a 510 , a 860 , and a 1.1 resistor. What is the maximum resistance you can obtain by combining these.

Computing effective memory access time : Assume that 80 percent of the accesses are in the associative memory and that, of the remaining, 10 percent (or 2 percent of the total) cause page faults.What is the effective memory access time?

Organizational development- describe od interventions : Research and describe each step in the action research model and explain two tools OD can use to identify problems in your organization.

Discuss the effect of higher interest rates : Mike Lane will have $5 million to invest in 5 year United State Treasury bonds three months from now. Lane believes interest rates will fall during the next 3 months and wants to take advantage of prevailing interest rates by hedging against a declin..

Importance of audit committee : The audit committee helps to assure independence. The audit committee is comprised of directors, not managers, and their job is to appoint, retain, oversee, evaluate and terminate the audit firm.

Explain corporate citizenship tests as they pertain : Explain corporate citizenship tests as they pertain to ABC's conduct and What would be the advantages and disadvantages to ABC if it were to apply each of these tests?

Balancing power between stakeholders : Balancing Power Between Stakeholders - Explain why is it important to maintain a balance of power between different groups of organizational stakeholders?

Find stock selling price : The risk-free rate of return is 11 percent; the required rate of return on the market is 14%; and Schuler Company's stock has a beta coefficient of 1.5.

User Account

All Pages