Suppose you have a loan of $5,000,000 outstanding, on which you will have to make a floating rate interest rate payment on monday october 3rd. the interest payment is determined based on a 3 month libor rate on that day. you fear that in the next several days the rate might rise. so you hedge yourself by trading eurodollar futures. assume that you enter into the position at close of day on monday september 26th.

questions:

a. in order to hedge yourself, which position in eurodollar futures will you take (i.e buy or sell, contract maturity, and the number of contracts)?

b. what is the value of your futures position on monday september 26th?

c. what is your daily gain or loss on your futures position (on tuesday, wednesday , thursday, friday and monday)?

d. what is the interest rate payment that you have to make on monday, october 3rd on your $5,000,000 loan?

e. what is the net cost to you, taking into account the gains/losses on your hedge, plus the interest payment on the loan (ignore the time value of money)?

2. companies a and b have been offered the following rates per annum on a $100 million 5 year loan

. fixed rate floating rate

Company A 4.0% libor+0.2%

Company B 5.2% libor + 0.8 %

company A requires a floating rate loan; company b requires a fixed rate loan. design a swap that will appear equally attractive to both companies

hint: figure out a range for the swap rate

3. consider the following borrowing costs faced by the following 3 companies

. fixed rate floating rate

company A 5.0% libor + 0.2%

company B 4.5 % libor - 0.1 %

company C 5.3% libor + 0.4%

if company A wants to borrow fixed rate funds, what is the lowest possible cost of funds that this company could achieve? assume that if any two companiesenter into the swap transactions, they split the possible savings equally.

hint: consider all possible ways that company A could borrow fixed rate funds

Daily Settlements for Eurodollar Futures (FINAL)Trade Date: 09/27/2016 (Tuesday) Month Open High Low Last Change Settle Estimated Volume Prior Day Open Interest OCT 16 NOV 16 99.1325 99.1250 99.1325 99.1250 99.1200 99.1100 99.1275 99.1200 -.0050 -.0050 99.1275 99.1200 41,109 38,081 251,792 94,419 DEC 16 JAN 17 99.1000 99.0750 99.1000 99.0750 99.0700 99.0700A 99.0900 99.0750 -.0100 -.0050 99.0850 99.0750 295,720 90 1,571,699 511 FEB 17 - - -.0100 99.0650 0 103 99.0650A 99.0700B Daily Settlements for Eurodollar Futures (FINAL)Trade Date: 09/29/2016 (Thursday) Month Open High Low Last Change Settle Estimated Volume Prior Day Open Interest OCT 16 NOV 16 99.1525 99.1350 99.1525 99.1350 99.1425 99.1200 99.1475 99.1200 -.0025 -.0050 99.1450 99.1250 71,122 26,279 268,608 115,764 DEC 16 JAN 17 99.0900 99.0750 99.0950 99.0750 99.0800 99.0700A 99.0800 99.0750 UNCH UNCH 99.0850 99.0750 310,423 210 1,616,987 511 FEB 17 - - - - +.0050 99.0750 0 103 Daily Settlements for Eurodollar Futures (FINAL)Trade Date: 10/03/2016 (Monday) Month Open High Low Last Change Settle Estimated Volume Prior Day Open Interest OCT 16 NOV 16 99.1375 99.1200 99.1375 99.1200 99.1275 99.1100 99.1325 99.1100 -.0075 -.0100 99.1300 99.1100 17,889 10,446 276,265 119,565 DEC 16 JAN 17 99.0800 - 99.0800 - 99.0600 99.0700 99.0550A 99.0550A -.0150 -.0100 99.0650 99.0550 175,076 0 1,624,209 593 FEB 17 - - 99.0550A 99.0550A -.0200 99.0450 0 103 3-month LIBOR rate: September 26, 2016 September 27, 2016 September 28, 2016 September 29, 2016 September 30, 2016 October 3, 2016 0.85294 0.85294 0.85378 0.83769 0.84561 0.85367