Question
.A corporate cash manager who often invests her firms excess cash in the Eurodollar market is considering the possibility of investing $20 mil- lion for
.A corporate cash manager who often invests her firms excess cash in the Eurodollar market is considering the possibility of investing $20 mil- lion for 180 days directly in a Eurodollar CDat 6.15 percent. As an alternative, she considers the fact that the 90-day rate is 6 percent and theprice of a Eurodollar futures expiring in 90 days is 93.75 (the IMM index). She believes that the combination of the 90-day CD plus the futures contract would be a better way of lending $20 million for 180 days. Suppose she executes this strategy and the rate on 90-day Eurodollar CDs 90 days later is 5.9 percent. Determine the annualized rate of return she earns over 180 days and compare it to the annualized rate of returnon the 180-day CD.
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