In May, Jacqui decides to hedge her planned borrowing of $1,000,000 for 110-days in December. At this time, the yield on 90-day bank bills is 2.5% and contracts for June, September and December exercise are quoted at 97.45, 97.35 and 97.25 respectively, however, Jacqui believes that interest rates might increase to 3.1% by December.

In December, Jacqui issues commercial paper with a face value of $1 million and 110-day maturity at 1.6% p.a. and closes her futures position when December futures prices are 98.20.

i) Complete the table below to indicate what action Jacqui must take in both the futures and physical markets on each date to hedge the cost of her planned borrowing.

ii) Calculate the profit from her futures trading and her net proceeds (in dollars) from her hedged position.

[Note any assumptions you consider necessary.]

 

Date of activity Futures market activity May December Physical market activity