Question

Suppose Ms. Hunter anticipates a cash inflow of $9.875 million in September that she plans to invest in ten $1 million face value T-bills with a maturity of 91 days. Suppose there is a September T-bill futures contract trading at a discount yield of 5%.

a) (1 mark) Describe the interest rate risk that she is facing. Is it better if interest rates increase or decrease?

b) (1 mark) How could she lock in the purchase price on her T-bills?

c) What will be the locked in purchase price?

Answer 1

a)She is paln to invest in treasury bills and if the interest rate decrease the price of Treasury bill increases.So she is facing interest rate decrease risk .

It is better if interest rate increase because this will lead to fall of price of treasury bill. and she can invest at low price.

b) She can lock in the purchase price on her T-bills by purchasing the future contract with a discount yeild of 5%.

c)

Yeild =[(Future Value- Purchase Price) / Future Value]*(365/n)

0.05 = [(10*1 -Purchase Value)/10 ]*365/91

Purchase Value = $9.875 Million