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The treasurer for Pittsburgh fron Works wishes to use finandal futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at
The treasurer for Pittsburgh fron Works wishes to use finandal futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $170.000 per contract. It is Juty and the contracts must be closed out in December of this year. Long-term interest rates are currently 8.30 percent. If they increase to 10.50 percent, assume the value of the contracts will go down by 15 percent. Also If interest rates do increase by 22 percent, assume the firm will have additional interest expense on its business loons and other commitments of $139,000. This expense, of course, will be separate from the futures contracts. 0. What will be the profit or loss on the futures contract if interest rates increase to 10.50 percent by December when the contract is closed out? b-1. After consideting the hedging. What is the net cost to the firm of the increased interest expense of $139.000
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