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Suppose it is currently May 23, 2008, and your firm will need to borrow $100 million on June 19 until October 5. You can borrow
Suppose it is currently May 23, 2008, and your firm will need to borrow $100 million on June 19 until October 5.
You can borrow at the prevailing 90-day LIBOR plus 150 basis points. The current June Eurodollar futures price is 90.65.
Assume that all funds are received immediately.
Construct a hedge that will lock in your borrowing rate. What is the appropriate hedge ratio?
Suppose the 90-day LIBOR is either 7% or 10% on June 19. Show your net interest cost under both scenarios.
Intuitively, why do you get this result?
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