x + Exam 2 c Not secure l eztomheducationconvhmtpr xposure. She will sell ive Tr

Question

x + Exam 2 c Not secure l eztomheducationconvhmtpr xposure. She will sell ive Treasuny in December of this year. Long-term interest The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate e futures contracts at $195,000 per contract. It is Jully and the contracts must be closed out rates are currently 14.30 percent. If they increase to 15.50 percent, assume the if interest rates do increase by 1.2 percent, assume the firm will have additional interest e commitments of $158,000. This expense, of course, will be separate from the futures contracts expense on its business loans and other a. What will be the profit or loss on the futures closed out? contract if interest rates increase to 15.50 percent by December when the contract is futures contracts b-1. Aftler considering the hedging, what is the net cost to the firm of the increased interest expense of $158,0007 cost b-2. What percent of this $158,000 cost did the treasurer effectively hedge away? (input your answer as a percent rounded to 2 decimal places.) hedged c. Indicate whether there would be a profit or loss on the futures contracts if interest rates went down Loss Profe 0 Type here to search F1 F4 F6

Explanation / Answer

a Sales price per contract $195,000 Purchase Price 165750 (195000*0.85) - 15% decline Gain per contract $29,250 No of contracts 5 Profit on futures contract $146,250 Profit on futures contract $146250 b-1 Increased Interest Cost $158,000 Profit on future contract $146,250 Net Cost $11,750 b-2 Hedge effectively - Net Cost/Increased interest 11750/158000 7.44% Net Cost is 7.44% which means 92.56% the treasurer effectively hedge away c If interest rates went down, there would be loss on the future contract as this would lead to higher bond value which would exceed the sales price

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