The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five reasury futures contracts at $163,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 12.30 percent. If they increase to 13.50 percen assume the value of the contracts will go down by 20 percent. Also if interest rates do ncrease by 1.2 percent, assume the firm will have additional interest expense on its business loans and other commitments of $168,000. This expense, of course, will be separate from the futures contracts. a. What will be the profit or loss on the futures contract if interest rates in crease to 13.50 percent by December when the contract is closed out? on futures contracts b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of S168,000? Net cost b-2. What percent of this $168,000 cost did the treasurer effectively hedge away? (Input your answer as a percent rounded to 2 decimal places. Percentage hedged away

pur-new-sol

Related Questions