Elliott Company sold one T-Bill futures contract when the quoted price was 93.25

Question

Elliott Company sold one T-Bill futures contract when the quoted price was 93.25. When the position was closed out, the price of the T-Bill futures contract was 94.12.

A.) Did interest rates increase or decrease? How do you know?

B.) What was Elliott’s profit or loss from this contract (ignoring transaction costs)?

C.) Assume that Elliott was speculating, did the company benefit from (or was it hurt by) this transaction? Explain (very) briefly.

D.) Assume that Elliott was using this contract to hedge. Did Elliott benefit from, or was it hurt by, this transaction? Explain (very) briefly.

Explanation / Answer

1) Price of bonds are inversely prportional to interest rates. Since bond price has increased, interest rate has decreased.

2) Elliot's loss = 93.25 - 94.12 =- 0.87

3) Company was hurt by this transaction because it ended up having a loss of 0.87 without any underlying security to offset the loss.

4) If Elliot was using the contract to hedge that means he was also long on the underlying. due to the hedge he lost 0.87, however he gained an equal amount on holding the underlying due to decrease in interest rate. It was a no loss no gain scenario

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