An Investment Banking Firm Discovers That 90 Days from Today

Essay

An investment banking firm discovers that 90 days from today, it is due to receive a cash payment from one of its corporate clients of $972,500. The firm's portfolio manager is instructed to plan to invest this new cash for a horizon of three months, after which it will need to be liquidated. Interest rates
are attractive today at 10 percent, but a steep decline is forecast due to a developing recession. The portfolio manager decides to try to guarantee a 9 percent rate of return today on this planned three-month investment of cash.
a. Describe what the manager should do today in the financial futures market. Then, indicate how he will close out the futures position eventually.
b. What are the appropriate (buy-sell) steps for the manager if options on financial futures are to be used? T