Show the cash flow consequence of putting on the trade

Reference no: EM132173373

Question - Suppose that you are the Treasurer of a small bank. You expect a $100 million deposit from a major client on September 1. Since the client will need the funds in about 6 weeks you plan to place these funds in the Federal Funds market while on deposit (since by now the Fed has normalized its monetary policy, and the interest rate on excess reserves is always 25 basis points below the federal funds rate target). If you want to hedge against the risks of unexpected changes in the Federal Funds rate during the month of September what trade will you make in the Federal Funds Rate Futures Contract? Suppose that you put on this trade today (August 27, 2018).

(a) Show the cash flow consequence of putting on the trade.

(b) Show your cash flows in both the futures market and the federal funds market over the month of September on the $100 million, if the Fed raises its target rate to 3.5% at its September meeting. What would they have been if you had not put on the hedge?

(c) Show your cash flows in both the futures market and the federal funds market over the month of September on the $100 million, if the Fed does not change its target rate at its September meeting. What would they have been if you had not put on the hedge?

(d) Show your cash flows in both the futures market and the federal funds market over the month of September on the $100 million, if the Fed lowers its target rate to 2.75% at its September meeting. What would they have been if you had not put on the hedge?

(e) Does the futures market allow you to lock in the current federal funds rate for the month of September? Explain.

Reference no: EM132173373

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