Question: On March 20 a company treasurer realizes that on June 18 the company will have to issue $10 million of commercial paper with a maturity of 180 days to fund purchases of inventories needed to meet upcoming orders in the last quarter of the year. If the paper were issued today the company would receive $9, 756,000 and would have to pay back $10 million after the 180 day period. June Eurodollar futures are trading at an index of index is quoted as 95.80.
(a) what interest rate is associated with the company's paper issuance? Assume discrete semiannual compounding)
(b) what should the company do in the futures market in order to hedge their risk? (position and number of contracts) On June 18 the company is issues its commercial paper. It can now receive $9, 803, 500 for its commercial paper issuance. The September Eurodollar futures index is quoted as 96.80.
(c) Relative to the spot interest rate what has happened to interest rates between March 20 and June 18 faced by the company
(d) If the company had not hedge what interest rate would the face on June 18?
(e) How much did the company make or lose in the futures market?