Question
A company wishes to use financial futures to hedge its interest rate exposure. The company will...
A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $6.7k per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.28%. If they increase to 14.75%, assume the value of the contracts will go down by 4%. Also if interest rates do increase by 1.35%, assume the firm will have additional interest expense on its business loans and other commitments of $4.4k. This expense will be separate from the futures contracts. Note: The term “k” is used to represent thousands (× $1,000).
Required: What PERCENT of this $4.4k cost did the company effectively hedge away?
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