Question38 You are the treasury manager of an Australian bank. The bank will need to borrow $16,000,000 in two months’ time by issuing 90-day bank bills. The current interest rate is 7.00%, and the quoted price for 90-day bank-accepted bill futures contracts expiring in three months is 92.30. (Assume 365 days in a year, each futures contract has a standard face value of $1,000,000, and the price quotation is based on yield.) (a) Today, what position would you take in the futures market to hedge this risk?Enter "1" for buy/long futures contracts or "2" for sell/short futures contracts [input] (b) After two months, interest rates fall to 6.75 % and the quoted price for bank-accepted bills futures contracts is 92.8. What is the profit or loss on the futures market? (round your answer to two decimal places, for a loss enter a negative number) [input] What is the profit or loss on the physical market? (round your answer to two decimal places, for a loss enter a negative number) [input] (c) Was this a perfect hedge? Enter “1” for yes and “2” for no [input] Maximum marks: 4.72 Flag question undefined

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We start by restating the components of the problem to ensure clarity on what is being asked and what the given answers imply. - The bank needs to borrow $16,000,000 in two months by issuing 90-day bank bills. - The current rate is 7.00%. The 90-day bank-accepted bill futures expiring in three months quotes at 92.30. - (a) We must decide whether to buy/long or sell/short futures to hedge. - (b) After two months, rates fall to 6.75% and the futures price is 92.8. We need the futures P/L and the physical (spot) P/L. - (c) Decide if this hedge is perfect. The provided answers are: (a) 2 (sell/short futures), (b) 21917.81 (futures P/L), (b) -10839.73 (physical P/L), (c) 2 (not a perfect hedge). Now, let’s examine each part in turn and explain why the stated answers are appropriate, and why alternative choices would be inappropriate. Part (a): Why choose option 2 (sell/short futures)? - The bank will need to borrow in two months, meaning its cost of funds over the 90-day horizon will be determined by short-term interest rates at that future time. If rates rise, the borrowing cost increases; if rates fall, the borrowing cost decreases. To hedge against the uncertainty in future rates, the bank can take a po......Login to view full explanation

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