background:

a company need to borrow $500m or its equivalent in any currency that the company decided to borrow in. The amount would be needed from January 2004-2006. they forecast that interest rates were likely to increase over the next three years.

current libor is 4.5%

Issue:

CEO wondering whether to borrow in the Euro

given that it has the lowest interest rate in the country in which their company operated.

Question:

-If they decided to hedge using interest rate futures, should it buy or sell futures on the Euro and why?

Given the maturity of 1,3,6,9, and 12 months available interest futures. (you don't need to calculate this. those maturities available to be selected to match the exposure)

-How can they hedge long term (3 years) borrowing position?

the question is not a calculation question, please answer the question with a complete explanation.

Thank you!

Exhibit 2: LIBOR Interest Rate Forecasts Currency Euro Dollar British Pound Japanese Yen Swiss Franc 2004 Forecast 2.5% 4.5% 5% 0.2% 0.7% 2005 - Forecast 2.7% 5% 5.5% 0.5% 1% 2006 - Forecast 3.3% 5.7% 5.8% 0.7% 1.2% Exhibit 2: LIBOR Interest Rate Forecasts Currency Euro Dollar British Pound Japanese Yen Swiss Franc 2004 Forecast 2.5% 4.5% 5% 0.2% 0.7% 2005 - Forecast 2.7% 5% 5.5% 0.5% 1% 2006 - Forecast 3.3% 5.7% 5.8% 0.7% 1.2%