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Lecture 6 - Tutorial

The treasurer of a company needs to invest 30 million euros for six months and is considering short-term interest rate futures contracts on the Euribor. Based on the current futures prices: 1) The assistant recommends buying 30 September futures contracts, which would lock in a forward rate for the six month period. 2) Based on the September futures price of 97, the implied six month LIBOR rate would be 3.03%. 3) On the last day of trading for the September contract, the effective rate achieved after closing out the position would be 3.31%, based on the cash and futures rates provided.

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Carmen Alexandra Iamandii
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26 views

Lecture 6 - Tutorial

The treasurer of a company needs to invest 30 million euros for six months and is considering short-term interest rate futures contracts on the Euribor. Based on the current futures prices: 1) The assistant recommends buying 30 September futures contracts, which would lock in a forward rate for the six month period. 2) Based on the September futures price of 97, the implied six month LIBOR rate would be 3.03%. 3) On the last day of trading for the September contract, the effective rate achieved after closing out the position would be 3.31%, based on the cash and futures rates provided.

Uploaded by

Carmen Alexandra Iamandii
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lecture Six Short-term Interest Rate Futures

Date: Monday 10 June Situation A corporate treasurer is informed by her sales department that her company will receive a payment of EUR 30 million for value 15 September, by way of advance on a supply order. The cash will be available for a period of six months, after which it will be required to purchase the necessary equipment. Amid market talk of a possible cut in European interest rates, the treasurer is keen to lock into a forward deposit rate now. At this point she checks the latest futures prices. Three Month Euribor Futures - EUR 25 per 0.01% Nr. days from today 96.35 16 June 6 96.25 15 September 97 96.10 15 December 188 95.96 15 March 279 Price Delivery

Month JUN SEP DEC MAR

a) Which trade would you recommend to the treasurer?

Buy 30 SEPs Sell 30 SEPs Buy a strip of 30 SEPs and 30 DECs Sell 60 SEPs
b) If the futures order in a) was filled at the market prices shown, what would be the

implied six month LIBOR achieved?

c) On 13 September, the last trading day of the SEP contract, EUR rates are as follows:

Cash Deposits 3 months 3.20 - 3.25 6 months 3.30 - 3.35 DEC Futures 96.59 What is the effective deposit rate achieved by the treasurer, to 2 decimal places?

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