An investor anticipates she will have funds to invest in the T-Bill market. If she hedges...
- An investor anticipates she will have funds to invest in the T-Bill market. If she hedges by buying futures contracts and rates decline, which of the following is true?
- The investor will profit on the futures contract.
- The investor will profit in the cash market.
- The investor will have locked in a minimum 10% return.
- The investor will lose in the cash market.
- Both a. and d. are true.
Homework Answers
Option E -
Futures are inversely related to the interest rates and bond prices.
The investor hedged in order to limit the interest rate risk and purchased a future contract.
so when interest rates decline, the price of futures contract will go up. So she will be in profit on futures contract as it will be above her buying price.
and she will lose money in cash markets , as the interest rates have fallen. so lower interest rate will give lower interests.
Hence both (a) and (d) are true. So right answer is Option E
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