Topic 4: Interest Rate Futures

Tutorial Questions
Hull (2014) Ch. 6

Question 6.16
Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have
to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued
today, the company would realize $4,820,000. (In other words, the company would receive
$4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days’ time.) The
September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the
company’s exposure?

Question 6.25
The December Eurodollar futures contract is quoted as 98.40 and a company plans to
borrow $8 million for three months starting in December at LIBOR plus 0.5%.
(a) What rate can then company lock in by using the Eurodollar futures contract?
(b) What position should the company take in the contracts?
(c) f the actual three-month rate turns out to be 1.3%, what is the final settlement price on
the futures contracts.
Ignore timing mismatches between the cash flows from the Eurodollar futures contract and
interest rate cash flows.

Additional Questions
1. You have just bought a December 90 Day BAB futures contract at a price of 95.22. Immediately
after your purchase, the Reserve Bank announces a surprise increase in the cash rate to 5.00%.
The yield on spot 90 day BAB’s rises to 5.03% and the December futures contract price falls to
94.90. Calculate your gain or loss on this trade (use formula not approximation technique).

2. With respect to 90 BAB futures traded on the SFE, which of the following statements is true:
(a) a borrower would take a long position in BAB futures to hedge against an interest rate rise
(b) an investor would take a short position in BABs to hedge against a decrease in interest rates
(c)a speculator anticipating a rise in interest rates would take a short position in BABs
(d) none of the above are true

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3. You observe the following information relevant to Australian conditions:
Forward rate agreements available today:
3 x 6 FRA = 5.10%
6 x 9 FRA = 5.20%
90 day Bank Bill futures quotes maturing in:
3 months = 94.90
6 months = 94.75
Your company has a rolling, 90 day bank bill facility with its bank. It has just issued 200 x
$100,000 face value, 90 day bank bills and intends to roll -over (re-issue) this debt at the end of
each quarter for the next three quarters. Company management is concerned about the
possible impact of forecasts for rising interest rates over the coming year and has instructed
you to propose interest rate hedging strategies using:
(i) forward rate agreements, and
(ii) 90 day BAB futures.

Required
Construct appropriate hedges for the next two rollover dates (3 months and 6 months from
now) and evaluate the outcomes if
(a) the bank bill rate is 5.02% at settlement in 3months time
(b) the bank bill rate is 5.50% at settlement in 6months time
Assume that 90 BAB futures close at 94.98 in 3months and 94.50 in 6months time.

4. On March 24 an investor went short a June 10 year bond futures contract on the SFE at a price
of 94.310. Three weeks later the investor closed out this futures position at a price of 94.515.
Calculate the investor’s approximate gain or loss on this trade.