Question
On January 3rd, the treasurer discovers that the company needs to secure a loan of 10,000,000 eurodollars for a duration of three months starting in
On January 3rd, the treasurer discovers that the company needs to secure a loan of 10,000,000 eurodollars for a duration of three months starting in February. The treasurer foresees a significant increase in eurodollar interest rates during January.
a) How can the treasurer protect against the anticipated rise in interest rates using 3-month eurodollar futures if the futures quote for 3-month March eurodollar futures on January 3rd is 94.35? The interest rate for borrowing on the same day is 5.6% per annum, and the contract size is 1,000,000 eurodollars.
b) If the borrowing rate climbs to 6.1% per annum at the beginning of February and the corresponding futures quote for March eurodollar futures is 93.85 at the same time, what is the increase in interest expenses due to rising interest rates, and what portion of that increase is offset by the hedging position?
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