2. A business signed a sales contract that the business will receive $2M 6 months from now. The business has a cash outflow 8
2. A business signed a sales contract that the business will receive $2M 6 months from now. The business has a cash outflow 8 months from now. The business can invest in short- term investment with a 5.4% APR today. As the equity market faced selling pressure recently, the wealth effect would reduce spending in the recent future. The manager believes the interest rate would reduce in 6 months from now. The current implied interest rate is 5.4% for interest rate future. Assume the implied interest rate becomes 4.9% at the end of 6 months. Should the business take a long or short position in interest rate future? How much is the outcome from hedging the drop of interest rate? (15 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
1 Initial Investment Calculation The business is expecting 2 million in 6 months They can invest thi...See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started