A company has a short term note payable outstanding at an interest rate of 3%, and must refinance this liability in 90 days. The company wants to hedge against the possibility that interest rates will be higher at that time. If the interest rate on U.S. Treasury bills is highly correlated with the rate on the notes, which investment is an effective hedge?

Question

Quizplus · Accepted Answer

Taking a short position in U.S. Treasury bill futures would profit if interest rates rise, as the value of the futures would decrease, offsetting the increased cost of refinancing the note.

A Company Has a Short Term Note Payable Outstanding at an Interest