A company needs to borrow money in six months’ time for six months and interest

Question

A company needs to borrow money in six months’ time for six months and

interest rates are expected to rise. The current data is given below.

Price Interest Rate
Spot 9520 4.80
1 Dec 9508 4.92
2 Mar 9505 4.95
3 Jun 9496 5.04
4 Sep 9499 5.01

Current Date Sep
Loan Required March
Payment Per Annum 2
Loan Amount 5,000,000
Contract Size 1,000,000
Number of Contracts 5

The loan is 5,000,000 and the standard contract size 1,000,000 meaning

that five contracts are required. Calculate the overall position if the March

spot price is 4.95 per cent and the future rises to 9520 (4.80 per cent). Was

there an overall profit or loss?

Explanation / Answer

Since , interest rates are expected to rise we will Buy the futures.

No fo Futures Purchased = 1000,000/9505 * 5

= 105 * 5

= 525 Futures

Profit form Futures = (9520-9505)*525

= $7875

..

Loss from increase in Interest rate = 5,000,000*(4.95-4.8)%*(6/12)

= 5,000,000*0.15%*(1/2)

= $3750

..

Overall Profit = 7875 - 3750

= $4125 .. Ans

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