What is the gain or loss on spot position-futures position

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Reference no: EM132054582

3. In March, Fiona Fox, Treasury Manager for the Global Gathering Corporation, and plans on purchasing $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.

a. Suppose Fiona wants to hedge her 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 she take short or long, and explain why?

Long or Short Position ___________

Explain why __________________

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?

Spot Gain or Loss ____________

Futures Gain or Loss _________________

Net Hedging Result ___________________

Reference no: EM132054582

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