A funds manager forecasts that it will need to invest $1 million in approximately 90 days....

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A funds manager forecasts that it will need to invest $1 millionin approximately 90 days. The manager wishes to receive a return asclose as possible to the medium-term interest rates currentlyavailable, but expects that rates will have fallen by the time thefunds are available for investment.
(a) Outline what the manager would do today in the financialfutures market in order to secure a return that is close to currentmedium-term market rates.
(b) Calculate the price of a three-year Treasury bond futurescontract quoted at 95.25. A Commonwealth Treasury bond futurescontract is based on a 6.00% per annum fixed interest bond with aface value of $1million and paying half-yearly coupons.
(c) Outline and explain the factors that will determine howsuccessful this strategy will be in securing an effective returnthat is close to today’s market rates.

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Answer a In such condition the fund managers may usedifferent strategies to hedge the risk of interest rate fall Somepopular strategies are Use of future contracts fund See Answer

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A funds manager forecasts that it will need to invest $1 millionin approximately 90 days. The manager wishes to receive a return asclose as possible to the medium-term interest rates currentlyavailable, but expects that rates will have fallen by the time thefunds are available for investment.(a) Outline what the manager would do today in the financialfutures market in order to secure a return that is close to currentmedium-term market rates.(b) Calculate the price of a three-year Treasury bond futurescontract quoted at 95.25. A Commonwealth Treasury bond futurescontract is based on a 6.00% per annum fixed interest bond with aface value of $1million and paying half-yearly coupons.(c) Outline and explain the factors that will determine howsuccessful this strategy will be in securing an effective returnthat is close to today’s market rates.