A 30-day Federal Fund (FF) futures contract is an instrument that enables banks

Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

GET A 40% DISCOUNT ON YOU FIRST ORDER

ORDER NOW DISCOUNT CODE >>>> WELCOME40

A 30-day Federal Fund (FF) futures contract is an instrument that enables banks to lock in a Federal funds interest rate for the 30-day period ending on the expiration of the contract.
FF futures are quoted as prices rather than as rates. The price quoted is 100 minus the 30-day Fed funds rate, with the rate being expressed as a percentage (not in decimal form). For example, if you buy/sell 1 FF futures at a price of $96.82, you lock in a Fed funds rate of 100 − 96.82 = 3.18% on your future lending/borrowing. The security underlying the FF futures is a $5,000,000 30-day deposit or loan. Consider a bank that has surplus cash of $10 million. The bank plans to lend this $10 million in the Fed funds market over June but to hedge its risk, it decides to lock in a return by buying FF futures that expire on June 30.
a) Calculate the change in the value of one FF futures contract for a 1 basis point change in the Fed funds rate.
b) Suppose that the bank bought the futures today for $99.780, and their price at expiration (June 30) was $99.824. Explain how the bank will meet its objective of locking in a return on its Fed funds lending over June.

Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

GET A 40% DISCOUNT ON YOU FIRST ORDER

ORDER NOW DISCOUNT CODE >>>> WELCOME40