A financial institution wants to hedge against a rise in the price of 91 day T-bills (fall in rates) for a future $20 million T-bill purchase three months from now. The FI decides to hedge with Eurodollar Future Contracts, with a minimum contract of $ 1 million. The hedge ratio that will be used is .95.
How many futures contracts should the FI get and what position, and what should the position be (long or short) and what is the net hedging result with the current discount rates and three month later discount rates given below where rates rose instead of fell in the future:
Discount Rates Today:
$\begin{array}{lc}
\text { Spot T-bill } & \text { Eurodollar Futures } \
0.34 \% & 1.00 \%
\end{array}$
$\text { Discount Rate 3-months Later: }$
$\begin{array}{lc}
\text { Spot T-bill } & \text { Eurodollar Futures } \
0.44 \% & 1.10 \%
\end{array}$

Question

A financial institution wants to hedge against a rise in the price of 91 day T-bills (fall in rates) for a future $20 million T-bill purchase three months from now. The FI decides to hedge with Eurodollar Future Contracts, with a minimum contract of $ 1 million. The hedge ratio that will be used is .95.
How many futures contracts should the FI get and what position, and what should the position be (long or short) and what is the net hedging result with the current discount rates and three month later discount rates given below where rates rose instead of fell in the future:
Discount Rates Today:
$\begin{array}{lc}
\text { Spot T-bill } & \text { Eurodollar Futures } \
0.34 \% & 1.00 \%
\end{array}$
$\text { Discount Rate 3-months Later: }$ 
$\begin{array}{lc}
\text { Spot T-bill } & \text { Eurodollar Futures } \
0.44 \% & 1.10 \%
\end{array}$

Quizplus · Accepted Answer

The correct answer is C. The FI should get 19 futures contracts and take a long position. The net hedging result is $250.The hedge ratio is .95, so the FI needs to get 19 futures contracts to hedge against the $20 million T-bill purchase. The FI should take a long position in the futures contracts because it is hedging against a rise in the price of T-bills (fall in rates).The current discount rate for spot T-bills is 0.34%, and the current discount rate for Eurodollar futures is 1.00%. Three months later, the discount rate for spot T-bills is 0.44%, and the discount rate for Eurodollar futures is 1.10%.The change in the discount rate for spot T-bills is 0.10%, and the change in the discount rate for Eurodollar futures is 0.10%. The FI will lose $10,000 on the T-bill purchase, but it will gain $10,250 on the futures contracts. The net hedging result is $250.

A Financial Institution Wants to Hedge Against a Rise in the Price