91-day Treasury bill rates = 9.71 percent 91-day Treasury bill futures rates = 9.66 percent
(Reminder: Treasury bill prices are calculated using the following formula:
P = FV × (1 - d_t/360)
Where P = price, FV = face value, d = discount yield, and t = days until maturity.)
Calculate the cash flows on the above futures contract if all interest rates increase by 1.49 percent.(That is, ΔR/(1 + R) = 1.49 percent, and 1 bp = $25.)

Question

Quizplus · Accepted Answer

The cash flows on the futures contract can be calculated using the following formula:
Cash flows = (Futures price at expiration - Futures price at initiation) x (FV/1+d) x 100
Since the futures rate decreased from 9.71% to 9.66%, the futures price at initiation will be higher than the futures price at expiration. Therefore, the cash flows will be negative for the investor who holds the long position and positive for the investor who holds the short position.

To calculate the cash flows, we need to first calculate the futures prices before and after the change in interest rates.

Futures price before the change:
Futures rate = 9.66%
Discount yield = (1 - 0.0966 x 91/360) = 0.0235 or 2.35%
Futures price = 100 - 0.0235 x 100 = 97.65 or $2,441.25

Futures price after the change:
Change in interest rates = 1.49%
New futures rate = 9.66% + 1.49% = 11.15%
New discount yield = (1 - 0.1115 x 91/360) = 0.0176 or 1.76%
New futures price = 100 - 0.0176 x 100 = 98.24 or $2,456

Using the formula above, we can calculate the cash flows for the short futures position:
Cash flows = (2456 - 2441.25) x (100,000/1.0235) x 100
Cash flows = $3,725.00

Therefore, the correct answer is B, the short futures position earns a profit of $3,725.00.

91-Day Treasury Bill Rates = 9