Question 12 1 3 month LIBOR is 1.00%. You observe the following prices for 3 month Eurodollar interest rate contracts that mature in exactly 3, 6, 9 and 12 month's time: 9 mths 6 mths 3 mths 12 mths Maturity 98.50 97.50 97.00 Price 98.10 The interest rate contract has a notional contract size of 500,000, with a contract being worth 12.50/bp. a. You know that you will receive 7m in six months, and you want to fix the interest rate you will receive on the money over the following three months. Explain clearly how you could use the interest rate futures contracts to protect yourself against a decline in interest rates over the period. Be specific about which contracts you would use, how many of them and show what your cash flow would be over the next nine months if forward interest rates at all maturities rise by 20bp in one month's time, but otherwise remain constant. Comment on the quality of the hedge. Question 12 1 3 month LIBOR is 1.00%. You observe the following prices for 3 month Eurodollar interest rate contracts that mature in exactly 3, 6, 9 and 12 month's time: 9 mths 6 mths 3 mths 12 mths Maturity 98.50 97.50 97.00 Price 98.10 The interest rate contract has a notional contract size of 500,000, with a contract being worth 12.50/bp. a. You know that you will receive 7m in six months, and you want to fix the interest rate you will receive on the money over the following three months. Explain clearly how you could use the interest rate futures contracts to protect yourself against a decline in interest rates over the period. Be specific about which contracts you would use, how many of them and show what your cash flow would be over the next nine months if forward interest rates at all maturities rise by 20bp in one month's time, but otherwise remain constant. Comment on the quality of the hedge