Discussion:

Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the company would realize $4,820,000. (In other words, the company would receive $4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days time.) The September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the companys exposure?

What is the major concern of the company's treasurer with regard to LIBOR?

How should she hedge her position with Eurodollar futures? State clearly how many contracts to buy/sell. {Hint: compute the dollar price of one Eurodollar contract.]

What will happen to your futures position, when LIBOR goes up? What about the proceeds from issuing the commercial papers? [Calculation not required, just a qualitative discussion.]

What will happen to your futures position, when LIBOR goes down? What about the proceeds from issuing the commercial papers? [Calculation not required, just a qualitative discussion.]