Question

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

My decision is to wait and not lock in the current T-bill rate of 1.765%.

Reason: The inflation in the US is expected to be increasing and the US Federal reserve is tightening the interest rates. In other words, the benchmark interest rates are being increased from time to time. So, most analysts expected another two or three interest rate hikes by the Fed in the current calendar year. So, it is better to wait until December since you can get a higher interest rate than what is on the table today.