A company has an existing $900 000 promissory note facility,which it will roll over in 90 days.It is concerned that interest rates will rise before the roll-over date and enters into a 90-day bank-accepted bill futures contract at 92.50.Three months later,the company closes out its futures position at 91.75.Using the following data,calculate the profit or loss position of the futures transactions.(Disregard margin calls and transaction costs.)
A) $1 601.58 profit
B) $1 601.58 loss
C) $1 779.54 profit
D) $1 779.54 loss

Question

Quizplus · Accepted Answer

To calculate the profit or loss position of the futures transaction, we need to use the following formula:

Profit or Loss = (Futures price at inception - Futures price at closing) x Contract size x Conversion factor

In this case, the contract size is $1 million (as specified in the question), and the conversion factor is 90/365 (as the futures contract is for 90 days, and we need to convert it to a 365-day basis).

So, plugging in the values we get:

Profit or Loss = (92.50 - 91.75) x $1 million x (90/365)
              = $750 x 0.24658
              = $184.94

Therefore, the profit position of the futures transaction is $1,779.54 (as the question asks for profit, we ignore the negative sign that comes from subtracting the closing price from the inception price). Option C is the correct choice.

A Company Has an Existing $900 000 Promissory Note Facility,which