FM Workshop on Futures

1. An investor buys four 3 month sterling interest rate futures contracts at a price of 90.70 and
later closes out her position by selling four 3 month sterling futures contracts at a price of 90.90, a
gain of 20 ticks. The tick value is £12.50. Each contract has a nominal value of £500,000.
Calculate the gain on the transaction.

2. A corporate treasurer expects to receive £20m in late September, six months hence. The money
will be needed for expansion purposes the following December. However, in the intervening
three months it can be deposited to earn interest. The treasurer is concerned that interest rates will
fall from the present level of 8 per cent over the next six months, resulting in a poorer return on
the deposited money. Three month sterling interest futures starting in late September are
available, priced at 92.00. Future nominal value and tick are the same as Q1.

Required
(a) Describe the hedging transaction the treasurer could employ
(b) Show the profit/loss on the underlying and the derivative if market rates fall to 7 per cent, and
if they rise to 9 per cent.

3. On 30 August 3 month STIRs are quoted as follows

 September 91.50
 December 91.70
 March 91.90
Red needs to borrow £15m for 3 months from late December and is worried about interest rate
rises. Show the outcome of a futures hedge if the spot rate is 7% or 10% in December.
Tick £12.50. Contract £500,000.