Reference no: EM132885313

Hedging with Interest Rate Futures

Hints: $ Price for T-bills and Eurodollar Futures:

$ Price = $ Amount {1 - [(d x n)/360]}

where d = discount yield as a fraction; n = maturity, usually 90 days]

In early April, a bank short-term investment manager has $1 million in 90 day T-bills that it plans to buy in June, and is worried about interest rates falling (i.e. T-bill prices rising) in the next few months, which would cause the price of the T-bills to rise. The current (spot) was a discount yield is 0.35% (i.e. a Discount % price of 99.65%) for a 90-day T-bill.

Problem a. What is the $ price for the $ 1 million of T-bills in dollars?

On the CME Group website, a June Eurodollar Futures contract gives a price of 99.70% (i.e., a discount yield of 0.30%) for a $1 million, 90 day Eurodollar Futures contract.

Problem b. What is the contract price for the Eurodollar Futures Contract in dollars? What type of Eurodollar futures contract should be purchased (long or short)? Explain why.

Problem c. Suppose in June the T-bill discount yield goes down by 20 basis points to 0.15%, and the Eurodollar Futures yield goes down by 20basis points to 0.10%, what is the new dollar price for the 1 mil. T-bills, and what is the new contract dollar price for the Eurodollar Futures Contract?