Question

On Oct. 15, 2020, an investor considered investing $15 million for 90 days on January 15, 2021. Current interest rate is 3% and it’s expected to decline to 2% on January 15, 2021. The investor decided to hedge with Euro$ futures that are quoted for March 2021 at 97.50.   On January 15, 2021 the Euro$ futures are quoted at 98.30. Determine the effective rate at which the investment is made.

A.

2%

B.

2.6

C.

2.8

D.

3.0

Answer 1

return from investmetn 2%

in order to hedge his investment with euro futere we must short on euro futres 97.50 i.e = 2.5%

we close his position by entering long on jan 15 2021 98.30 i.e 1.7%

profit =sellig rate - buying rate = 2.5%- 1.7% =0.8%

effective interest rate = return from investment + profit from hedging

=2%+0.8%

=2.8%

option C is correct