Question
A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $139k per contract.
A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $139k per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.92%. If they increase to 14.52%, assume the value of the contracts will go down by 6%. Also if interest rates do increase by 1.14%, assume the firm will have additional interest expense on its business loans and other commitments of $53k. This expense will be separate from the futures contracts. Note: The term k is used to represent thousands ( $1,000). Required: In percentage terms, what is the net gain (or cost) to the firm once the increased interest expense is accounted for? Answer % Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places (for example: 28.31%).
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