I'm working through problems in the textbook in preparation for a test and this is the only one I can't figure out. Wondering if I could get some help. Thanks.
If it is Feb. 20th and the treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with 180 day maturity. If the paper were issued today, the company would receive $4.82 million. In 180 days, the company will have to redeem the commercial paper for $5 million. The September Eurodollars future price is quoted as 92.00. How would the treasurer hedge the company's risk exposure?
The problem is that on 20th Feb., the treasurer realizes that the company will have to issue $5 million of commercial paper with 180 days maturity on July 17th. If the paper were issued today, the company would receive $4.82.million.
Now, according to the plans of the company, receiving $4.82 million on July 17 is acceptable. However, the commercial paper is transnational and in the interim there could be a change in the foreign exchange rate away from 92.00 causing the plans of the company to go haywire. For instance, if the September Eurodollars rate swung in favor ...