2. Hedging a Forward Investment Hedge Setting: February 15, 2023

An institution expects to collect $100 million in receivables in 4 months (June 15) and plans to invest that money for the 92 day period running from June 15 to Sep 15. The institution views today's deposit rates as favorable and would like to lock in a forward investment rate.

Market Data for February 15th:

4 month deposit rates 5.00%

5-month deposit rates 5.25%

7-month deposit rates 5.50%

1)Is the institution hurt or helped by rising interest rates? How many SOFR futures would you buy or sell on 2/15 to hedge the exposure?

2)Suppose 2 months pass with no change in the deposit rate curve (i.e., 4mo = 5%, 5mo = 5.25%, 7mo = 5.5%). What is the correct hedge ratio now?