Question 1: Today is April 2017. Elle will need to borrow $4,000,000 for 90 days this coming October. Interest rate futures contracts for October exercise are quoted at 88.25. The notional contract value is $1,000,000. Elle decides to hedge her exposure. The 90-day interest rate turned out to be 10.5% in October.
Required: Demonstrate how Elle's hedging strategy locks her borrowing rate at 11.75% regardless of the spot interest rate in October.
Question 2: Mickie often speculates on interest rates and she forecasts that there will be a rise in short term interest rates in 4 months' time. She intends to use 10 year Treasury bonds, with face value of $100,000. This bond pays semi-annual coupons with a 4 percent coupon rate. Her usual position involves 5 contracts. Today she initiates a speculative position with 2 bond futures contracts at 98.40 and another 3 contracts at 96.80 one month later.
Calculate Mickie's trading gains / losses after 4 months when she squares her positions at 99.00.Your answer must include an explanation on the futures position that she should take to capitalize on her forecast.