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On March 20 a company treasurer realizes that on June 18 the company will have to issue $10...

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On March 20 a company treasurer realizes that on June 18 the company will have to issue $10 million of commercial paper with a maturity of 180 days to fund purchases of inventories needed to meet upcoming orders by the last quarter of the year. If the paper were issued today the company would receive $9, 756,000 and would have to pay back $10 million after the 180 day period. June Eurodollar futures are trading at an index of the index is quoted as 95.80.

On June 18 the company is issuing its commercial paper. It can now receive $9, 803, 500 for its commercial paper issuance. The September Eurodollar futures index is quoted as 96.80.

If the company had not hedge what interest rate would they face on June 18?

Commercial Paper:

It refers to the unsecured debt instrument issued by the company for the short tenure to raise funds to fulfill the financial needs like inventories, payroll, payables etc.

Mostly company issues the commercial papers like promissory notes and bill of exchange.

Answer and Explanation: 1

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Computation of Interest rate:

{eq}\begin{align*} {\rm\text{Interest rate without hedge}} &= \frac{{{\rm\text{Face value}} -...

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Commercial Paper: Definition, Advantages & Disadvantages

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Chapter 8 / Lesson 10
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A great way for companies with high credit ratings to raise short term cash for operating purposes is through commercial paper. Most large public companies issue commercial paper.


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