Interest Rate Futures Question from Hull, 8e
$begingroup$
There is this question 6.16 in Hull, 8e:
Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the company would realize $4,820,000. (In other words, the company would receive $4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days’ time.) The September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the company’s exposure?
The solution says 9.84 contracts should be shorted to achieve the intended outcome and arrives at this number as follows:
4,820,000*2/980,0000
I don't get where this 980,000 comes from?
fixed-income futures hedging eurodollars
asked yesterday
user523170user523170
82
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
There is this question 6.16 in Hull, 8e:
Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the company would realize $4,820,000. (In other words, the company would receive $4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days’ time.) The September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the company’s exposure?
The solution says 9.84 contracts should be shorted to achieve the intended outcome and arrives at this number as follows:
4,820,000*2/980,0000
I don't get where this 980,000 comes from?
fixed-income futures hedging eurodollars
asked yesterday
user523170user523170
82
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
add a comment |
$begingroup$
There is this question 6.16 in Hull, 8e:
Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the company would realize $4,820,000. (In other words, the company would receive $4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days’ time.) The September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the company’s exposure?
The solution says 9.84 contracts should be shorted to achieve the intended outcome and arrives at this number as follows:
4,820,000*2/980,0000
I don't get where this 980,000 comes from?
fixed-income futures hedging eurodollars
asked yesterday
user523170user523170
82
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
$endgroup$
There is this question 6.16 in Hull, 8e:
Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the company would realize $4,820,000. (In other words, the company would receive $4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days’ time.) The September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the company’s exposure?
The solution says 9.84 contracts should be shorted to achieve the intended outcome and arrives at this number as follows:
4,820,000*2/980,0000
I don't get where this 980,000 comes from?
fixed-income futures hedging eurodollars
fixed-income futures hedging eurodollars
asked yesterday
user523170user523170
82
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked yesterday
user523170user523170
82
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked yesterday
user523170user523170
82
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
asked yesterday
user523170user523170
82
asked yesterday
user523170user523170
82
82
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
New contributor
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
user523170 is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.
add a comment |
add a comment |
1 Answer
1
active
oldest
votes
$begingroup$
The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.
You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000
answered yesterday
Alex CAlex C
6,55411123
$endgroup$
add a comment |
Your Answer
StackExchange.ifUsing("editor", function () {
return StackExchange.using("mathjaxEditing", function () {
StackExchange.MarkdownEditor.creationCallbacks.add(function (editor, postfix) {
StackExchange.mathjaxEditing.prepareWmdForMathJax(editor, postfix, [["$", "$"], ["\\(","\\)"]]);
});
});
}, "mathjax-editing");
StackExchange.ready(function() {
var channelOptions = {
tags: "".split(" "),
id: "204"
};
initTagRenderer("".split(" "), "".split(" "), channelOptions);
StackExchange.using("externalEditor", function() {
// Have to fire editor after snippets, if snippets enabled
if (StackExchange.settings.snippets.snippetsEnabled) {
StackExchange.using("snippets", function() {
createEditor();
});
}
else {
createEditor();
}
});
function createEditor() {
StackExchange.prepareEditor({
heartbeatType: 'answer',
autoActivateHeartbeat: false,
convertImagesToLinks: false,
noModals: true,
showLowRepImageUploadWarning: true,
reputationToPostImages: null,
bindNavPrevention: true,
postfix: "",
imageUploader: {
brandingHtml: "Powered by u003ca class="icon-imgur-white" href="https://imgur.com/"u003eu003c/au003e",
contentPolicyHtml: "User contributions licensed under u003ca href="https://creativecommons.org/licenses/by-sa/3.0/"u003ecc by-sa 3.0 with attribution requiredu003c/au003e u003ca href="https://stackoverflow.com/legal/content-policy"u003e(content policy)u003c/au003e",
allowUrls: true
},
noCode: true, onDemand: true,
discardSelector: ".discard-answer"
,immediatelyShowMarkdownHelp:true
});
}
});
user523170 is a new contributor. Be nice, and check out our Code of Conduct.
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function () {
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2fquant.stackexchange.com%2fquestions%2f44760%2finterest-rate-futures-question-from-hull-8e%23new-answer', 'question_page');
}
);
Post as a guest
Required, but never shown
1 Answer
1
active
oldest
votes
1 Answer
1
active
oldest
votes
active
oldest
votes
active
oldest
votes
$begingroup$
The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.
You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000
answered yesterday
Alex CAlex C
6,55411123
$endgroup$
add a comment |
$begingroup$
The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.
You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000
answered yesterday
Alex CAlex C
6,55411123
$endgroup$
add a comment |
$begingroup$
The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.
You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000
answered yesterday
Alex CAlex C
6,55411123
$endgroup$
The future is at 92, so the interest rate is 8% per year (!the good old days!) or 2% a quarter. Two percent interest on one million is 20,000. So one future covers the interest on 980,000 initial amount and allows you to repay 1,000,000 at maturity 3 months later.
You initially borrow 4,820,000 so you need 4,820,000/980,000 futures (for a three month loan). But it is a 6 month loan, so you need twice as much to pay the interest, i.e. 4,820,000*2/980,000
answered yesterday
Alex CAlex C
6,55411123
edited yesterday
answered yesterday
Alex CAlex C
6,55411123
answered yesterday
Alex CAlex C
6,55411123
answered yesterday
Alex CAlex C
6,55411123
6,55411123
add a comment |
add a comment |
user523170 is a new contributor. Be nice, and check out our Code of Conduct.
user523170 is a new contributor. Be nice, and check out our Code of Conduct.
user523170 is a new contributor. Be nice, and check out our Code of Conduct.
user523170 is a new contributor. Be nice, and check out our Code of Conduct.
Thanks for contributing an answer to Quantitative Finance Stack Exchange!
- Please be sure to answer the question. Provide details and share your research!
But avoid …
- Asking for help, clarification, or responding to other answers.
- Making statements based on opinion; back them up with references or personal experience.
Use MathJax to format equations. MathJax reference.
To learn more, see our tips on writing great answers.
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function () {
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2fquant.stackexchange.com%2fquestions%2f44760%2finterest-rate-futures-question-from-hull-8e%23new-answer', 'question_page');
}
);
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function () {
StackExchange.helpers.onClickDraftSave('#login-link');
});
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
