Make the purchase of the t-bills more expensive

Assignment Help Financial Management

Reference no: EM132056392

In March, Jim Jones, Treasury Manager for the Julius Jones Jim Corporation, plans to purchase $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.

QUESTIONS

a. Suppose Jim wants to hedge his 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 he take short or long, and explain why?

Now,

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?

Reference no: EM132056392

Questions Cloud

Target capital structure of firm is capital structure : The target capital structure of a firm is the capital structure that

What do the results tell about the public image of nursing : Ask five people of different ages and gender who do not work in the health-care field what they think most nurses do. Compile their answers with the answers.

Borrow money from bank for period of one year : Suppose two firms want to borrow money from a bank for a period of one year. What is the loan rate for the firm?

Describe the personnel that will staff the given units : You have been named the Administrative Director at Trident International Hospital (TIH) and will be presenting your PPT to the Board of Directors at TIH.

Make the purchase of the t-bills more expensive : That would make the purchase of the T-bills more expensive in May with a purchase of 1 Eurodollar CD contract,

You have developed the data on three stocks : You have developed the following data on three stocks: Stock A has a standard deviation of .15 and a Beta of .79.

Pure profits from covered interest arbitrage activities : According to IRPT, only the most skilled arbitrageurs are able to earn pure profits from their covered interest arbitrage activities.

Identifies the research method and design of the study : Identifies the specific research method and design of the study and articulates the authors' reasoning for this selection as appropriate for the study's purpose

Prepare a cash flows statement and a compilation report : This case addresses the compilation and preparation of a set of financial statements for a first-year company's operations.

User Account

All Pages