You are the treasurer of a major Japanese construction company. Today is January 15. You expect to receive €10 million at the end of March, as payment from a client on some construction work in France. You know that you will need this sum somewhere else in Europe at the end of June. Meanwhile, you wish to invest these €10 million for three months. The current three-month interest rate in euros is 4%, but you are worried that it will quickly drop. Listed below are Euribor futures quotations on EUREX:
$$\begin{array} { l c }
{ \text { Maturity (manth-end) Price } } \
\hline \text { February } & 96.02 \% \
\text { March } & 96.08 \% \
\text { June } & 96.20 \% \
\text { September } & 96.25 \% \
\hline
\end{array}$$ a. Knowing that Euribor contracts have a size of €1 million, what should you do to freeze a lending rate when you will receive the money?
b. At the end of March, when you receive the money, the three-month Euribor is equal to 3%.
How much money (number of euros) have you gained by engaging in the above transaction
(as opposed to doing nothing on January 15)?

Question

You are the treasurer of a major Japanese construction company. Today is January 15. You expect to receive €10 million at the end of March, as payment from a client on some construction work in France. You know that you will need this sum somewhere else in Europe at the end of June. Meanwhile, you wish to invest these €10 million for three months. The current three-month interest rate in euros is 4%, but you are worried that it will quickly drop. Listed below are Euribor futures quotations on EUREX:
 $$\begin{array} { l c } 
 { \text { Maturity (manth-end) Price } } \
\hline \text { February } & 96.02 \% \
\text { March } & 96.08 \% \
\text { June } & 96.20 \% \
\text { September } & 96.25 \% \
\hline
\end{array}$$ a. Knowing that Euribor contracts have a size of €1 million, what should you do to freeze a lending rate when you will receive the money?
b. At the end of March, when you receive the money, the three-month Euribor is equal to 3%.
How much money (number of euros) have you gained by engaging in the above transaction
(as opposed to doing nothing on January 15)?

Quizplus · Accepted Answer

The Answer of You are the treasurer of a major Japanese construction company. Today is January 15. You expect to receive €10 million at the end of March, as payment from a client on some construction work in France. You know that you will need this sum somewhere else in Europe at the end of June. Meanwhile, you wish to invest these €10 million for three months. The current three-month interest rate in euros is 4%, but you are worried that it will quickly drop. Listed below are Euribor futures quotations on EUREX:
 $$\begin{array} { l c } 
 { \text { Maturity (manth-end) Price } } \
\hline \text { February } & 96.02 \% \
\text { March } & 96.08 \% \
\text { June } & 96.20 \% \
\text { September } & 96.25 \% \
\hline
\end{array}$$ a. Knowing that Euribor contracts have a size of €1 million, what should you do to freeze a lending rate when you will receive the money?
b. At the end of March, when you receive the money, the three-month Euribor is equal to 3%.
How much money (number of euros) have you gained by engaging in the above transaction
(as opposed to doing nothing on January 15)?

You Are the Treasurer of a Major Japanese Construction Company