Question

1. Assume you are involved in cash management for a U.S. multinational corporation. The company is expecting a $10 million cash receipt in December 2018. The investment horizon is 13 weeks. You are considering whether to lock in interest rates today with U.S. treasury futures or wait until December. Currently, 13 week T-Bill rate is 1.765%. What is your decision? You must explain your answer including why or why not hedge.

Answer 1

13 weeks is a lot of time and may lead to a wide fluctutaion of in interest rates to a variety of factors, hence one must hedge the recepit. One shall enter into a contract to lock in the rates. This shall provide stable amount of cash to the company. One has to bear in mind that the annual reports are prepared around December and any unfavorable movement in rates shall not lead to a low earnings scenario as this shall be worse for the company. The amount is large and this may result in loss of profitability if there is unfavorable movement