Question

2. Explain how each of the following agents might make use of derivatives. (a) A lender...


2. Explain how each of the following agents might make use of derivatives.
(a) A lender who is worried that interest rate might fall during the term of a loan it has made. Will this lender buy or sell futures contracts for Treasury bills?

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Answer #1

Lender is speculating that the interest rate might fall. This means that, the lender thinks that the future contracts value on Treasury bills will decrease. The lender can make money by shorting or selling the future contracts on Treasury bills. So, this lender will sell futures contracts for Treasury bills.

Note: If we expect the future contract price on an asset to fall, we short it to make money. If we expect the future contract price on an asset to rise, we go long or buy the future contract to make money.

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