A company wishes to use financial futures to hedge its interest rate exposure. The company...
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A company wishes to use financial futures to hedge its interest rate exposure. The company will sell 10 Treasury futures contracts at $137k per contract. It is Jul and the contracts must be closed out in Dec of this year. Long-term interest rates are currently 13.2%. If they increase to 14.52%, assume the value of the contracts will go down by 5%. Also if interest rates do increase by 1.25%, assume the firm will have additional interest expense on its business loans and other commitments of $53k. This expense will be separate from the futures contracts.
Note: The term k is used to represent thousands ( $1,000).
Required: In percentage terms, what is the net gain (or cost) to the firm once the increased interest expense is accounted for?
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