The December Eurodollar futures contract is quoted as 98.40 and a company plans to borrow $8 million for three months starting in December at LIBOR plus 0.5%.
(a) What rate can then company lock in by using the Eurodollar futures contract?
(b) What position should the company take in the contracts?
(c) If the actual three-month rate turns out to be 1.3%, what is the final settlement price on the futures contracts.
Explain why timing mismatches reduce the effectiveness of the hedge.