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? (2 marks) Type your answer here:

(b) What position and how many Eurodollar contracts should the company take in? (2 marks)

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(c) If the actual threemonth rate turns out to be 1.4% per annum, what is the final settlement price on the futures contracts? (3 marks)

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(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. (3 marks)

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