EXAMPLE: On November 1, 2000, a firm agrees to borrow $10M for 12 months, beginning December 19, 2000 at LIBOR + 100bps.

A STACK HEDGE WITH EURODOLLAR FUTURES:

DATA ON NOVEMBER 11, 2000

VOLUME OPEN INTEREST

DEC 00 46,903 185,609

MAR 01 29,236 127,714

JUN 01 5,788 77,777

SEP 01 2,672 30,152

DECISION: STACK on MAR the FUTURES FOR JUN AND SEP

AND ROLL OVER AS SOON AS OPEN INTEREST REACHES 100,000

The table below shows all the borrowers activities during the year:

DATE CASH FUTURES F. POSITION

11.1.00 8.44% Short 10 DEC 91.41 Short 10DEC

Short30 MAR 91.61 Short 30MAR

12.19.00 9.54% Long 10 DEC 90.46 Short 30MAR

1.12.01 9.47% Long 20 MAR 90.47 Short 10MAR

Short 20 JUN 90.42 Short 20JUN

3.13.01 9.75% Long 10 MAR 90.25 Short 20JUN

3.22.01 9.95% Long 10 JUN 89.78 Short10JUN

Short 10 SEP 89.82 Short10SEP

6.19.01 9.44% Long 10 JUN 90.56 Short10SEP

9.18.01 8.88% Long 10 SEP 91.12 NONE

Q1. Explain the trades on 1.12.01 and why they were taken.

Q2. Explain the trading on 3.22.01 and why they were taken.

Q3. Observe the table on the next slide. Show how to calculate the four cash flows shown on the line:

FUTURES($)c

PERIOD: 1 2 3 4

RATE(%)a: 10.54 10.75 10.44 9.88

INTERESTb: 263,500 268,750 261,000 247,000

FUTURES($)c: 23,750 91,000 12,500 -32,500

NET($) d: 239,750 177,750 248,500 279,500

EFFECTIVE RATE (%)e: 9.59 7.11 9.94 11.18

UNHEDGED AVERAGE RATE 10.40%

HEDGED AVERAGE RATE 9.455%

a. LIBOR + 100 BPS

b. ($10M)(RATE)(3/12)

c. (PRICE CHANGE)(25)(100)(10)

d. b - c

e.(NET/10M)(12/3)(100%).