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Interest Rate Futures Question from Hull, 8e

1

$begingroup$

There is this question 6.16 in Hull, 8e:

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?

The solution says 9.84 contracts should be shorted to achieve the intended outcome and arrives at this number as follows:

4,820,000*2/980,0000

I don't get where this 980,000 comes from?

fixed-income futures hedging eurodollars

share|improve this question

asked Mar 24 at 14:16

user523170user523170

82

$endgroup$

add a comment | 

1

$begingroup$

There is this question 6.16 in Hull, 8e:

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?

The solution says 9.84 contracts should be shorted to achieve the intended outcome and arrives at this number as follows:

4,820,000*2/980,0000

I don't get where this 980,000 comes from?

fixed-income futures hedging eurodollars

share|improve this question

asked Mar 24 at 14:16

user523170user523170

82

$endgroup$

add a comment | 

$begingroup$

There is this question 6.16 in Hull, 8e:

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?

The solution says 9.84 contracts should be shorted to achieve the intended outcome and arrives at this number as follows:

4,820,000*2/980,0000

I don't get where this 980,000 comes from?

fixed-income futures hedging eurodollars

share|improve this question

asked Mar 24 at 14:16

user523170user523170

82

$endgroup$

share|improve this question

asked Mar 24 at 14:16

user523170user523170

82

share|improve this question

asked Mar 24 at 14:16

user523170user523170

82

asked Mar 24 at 14:16

user523170user523170

82

asked Mar 24 at 14:16

user523170user523170

82

1 Answer
1

active

oldest

votes

3

$begingroup$

The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.

You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000

share|improve this answer

edited Mar 24 at 15:06

answered Mar 24 at 14:46

Alex CAlex C

6,65611123

$endgroup$

add a comment | 

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3

$begingroup$

The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.

You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000

share|improve this answer

edited Mar 24 at 15:06

answered Mar 24 at 14:46

Alex CAlex C

6,65611123

$endgroup$

add a comment | 

3

$begingroup$

The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.

You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000

share|improve this answer

edited Mar 24 at 15:06

answered Mar 24 at 14:46

Alex CAlex C

6,65611123

$endgroup$

add a comment | 

$begingroup$

The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.

You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000

share|improve this answer

edited Mar 24 at 15:06

answered Mar 24 at 14:46

Alex CAlex C

6,65611123

$endgroup$

share|improve this answer

edited Mar 24 at 15:06

answered Mar 24 at 14:46

Alex CAlex C

6,65611123

answered Mar 24 at 14:46

Alex CAlex C

6,65611123

answered Mar 24 at 14:46

Alex CAlex C

6,65611123