Suppose you have a loan of $10,000,000 outstanding, on which you will have to make a (floating-rate) coupon payment on Tuesday, February 24th. The coupon that you have to pay is determined by the interest rate implied by the Mar 15 Eurodollar futures contract as follows:

$ coupon payment = (Q_R)x(10,000,000)x(90/360)

Thus, if the Eurodollar closed at Q = 98% (Q_R = 2%) on Tuesday, you would have to pay 0.02x10,000,000x(90/360) = $50,000.

You fear that in the next several days the rate might rise. So you hedge yourself by trading the Mar 15 Eurodollar futures contract at the current level. Assume that you enter into the position at close of day on Tuesday, February 17th.

In order to hedge yourself, will you buy the contract, or will you sell the contract?

How many contracts will you trade?

What is your daily gain or loss in the contract (on, Wednesday, Thursday, Friday, Monday, and Tuesday)?

Using the Tuesday, Fenruary 24^th, settlement price, what is the coupon payment that you have to make on your $10,000,000 debt?

What is the net cost to you, taking into account the gains/losses on your hedge, plus the coupon payment?

Suppose you have a loan of $10,000,000 outstanding, on which you will have to make a (floating-rate) coupon payment on Tuesday, February 24th. The coupon that you have to pay is determined by the interest rate implied by the Mar 15 Eurodollar futures contract as follows:

$ coupon payment = (Q_R)x(10,000,000)x(90/360)

Thus, if the Eurodollar closed at Q = 98% (Q_R = 2%) on Tuesday, you would have to pay 0.02x10,000,000x(90/360) = $50,000.

You fear that in the next several days the rate might rise. So you hedge yourself by trading the Mar 15 Eurodollar futures contract at the current level. Assume that you enter into the position at close of day on Tuesday, February 17th.

In order to hedge yourself, will you buy the contract, or will you sell the contract?

How many contracts will you trade?

What is your daily gain or loss in the contract (on, Wednesday, Thursday, Friday, Monday, and Tuesday)?

Using the Tuesday, Fenruary 24^th, settlement price, what is the coupon payment that you have to make on your $10,000,000 debt?

What is the net cost to you, taking into account the gains/losses on your hedge, plus the coupon payment?