Question
Someone-Not-Something is a book publisher that specializes in vegan nutrition and animal rights. On May 25th, the company is going to have a cash inflow
Someone-Not-Something is a book publisher that specializes in vegan nutrition and animal rights. On May 25th, the company is going to have a cash inflow of $10 million and plans to invest these funds in 90-day T- bills. The publisher's CFO looked into derivatives and found out that there is a June Eurodollar futures contract with a current price of 94.75 and a contract size of $1 million. a. Explain the risk faced by Someone-Not-Something in the spot market and determine the futures position that the publisher can take in order to hedge against this risk. b. On May 25th, the T-bill rate and Eurodollar futures contract rate both are equal to 6 percent. Assuming that the publisher constructs the hedge position you have identified in part (a), calculate the hedged and unhedged effective return for the publisher. Explain whether the hedge was a mistake.
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