The December Eurodollar futures contract is quoted as 98.20 and a company plans to borrow USD8 million for three months starting in December at LIBOR plus 0.5% per annum.

(a )What rate can the company lock in by using the December Eurodollar futures contract?

(b) What position and how many Eurodollar contracts should the company take in?

(c) If the actual threemonth rate turns out to be 1.4% per annum, what is the final settlement price on the futures contracts?

(d) Based on the actual rate in (c), what is the effective borrowing cost for the company if it hedges using the Eurodollar futures contract? Is it a perfect hedge? Explain.