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Prudence Bank is a regular borrower in the interbank market. On the 9 th of August 2 0 2 3 , the head of the
Prudence Bank is a regular borrower in the interbank market. On the th of August the head of the Global Markets operations makes the decision to hedge the bank's interest cost on a threemonth Eurodollar issuance of US$ million, which is planned for November On August, the bank could issue US$ million in threemonth Eurodollars at The corresponding futures rates for the threemonth Eurodollar futures contracts are December March and June
REQUIRED:
A What is the banks specific cash market risk that it should be concerned with on August marks
B Should the bank buy or sell Eurodollar futures to hedge its borrowing costs? Which Eurodollar futures contract should the bank use? Explain why it is best. marks
C Assume that the bank takes the futures position that you recommended above at the rate available on August On November the bank issues US$ million in Eurodollars at Coincidently, it closes out reverses its futures position when the futures rate on the contract you chose equals Calculate the profit or loss on the futures trades, the opportunity gain or loss in the cash market, and the effective return or cost to the bank on its Eurodollar issue. marks
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