Question
A firm will need to borrow $90 million for three months, starting two years from today. They will be charged LIBOR plus 4.5% on the
A firm will need to borrow $90 million for three months, starting two years from today. They will be charged LIBOR plus 4.5% on the loan and want to hedge the interest rate to be paid using the Eurodollar futures market. Currently, the Eurodollar futures contract that matures in one year is quoted at 99.00.
a) What interest rate will the company end up paying on the loan with the Eurodollar hedge?
b) What position should they take in the futures market to implement the hedge (indicate long or short and the number of contracts)?
c) If the actual three-month LIBOR rate turns out to be 2.3% in two years, what is the total gain from the futures position?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started