A bank is considering issuing $2 million in time deposits for a term of 90 days....

A bank is considering issuing $2 million in time deposits for a term of 90 days. Currently interest rates are 1.00 percent on such deposits, however the bank expects rates on comparable deposits to rise to 1.10 percent when they issue the deposits. As a result, the bank plans to hedge its position by selling $2 million 30 day Federal Funds futures contract currently at an index price of 96. Interest rates rise as expected and the bank offsets its position by buying futures contracts at 95.76.

(a) Calculate the change in the dollar interest cost of issuing the deposits if interest rates rise. (8 points)

(b) Calculate the pre-tax gain or loss resulting from the futures position. (14 points)

(c) Calculate the overall combined pre-tax gain or loss from the cost of issuing deposits and the futures contract. (3 points)

Expert Solution

Use a spreadsheet for the ease in computation. Enter the values and formulas in the spreadsheet as shown in the image below.

The obtained result is provided below.

jeff jeffy answered 2 years ago

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