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A lender will be having £10 million to lend from December to March next year. Right...

A lender will be having £10 million to lend from December to March next year. Right now, the December Eurodollar futures contract has price 94. If the lender uses 10 December Eurodollar futures to hedge his future lending, does he long or short futures? If the 3-month LIBOR in December turns out to be 1.2% (3-month effective), how much money does the lender get in March from his hedged lending of £10 million?

Solutions

Expert Solution

Annual rate According to future contact= 100-94 =6%

He will Long the Futures

Effective 3-month rate = 1.5%

Benefit of futures contract = 0.3%

Total amount received after 3- month = 10 Million*(1.2%+0.3%)

= £150,000

(120,000 interest as per LIBOR+30,000 from Euro Dollar Futures)

jeff jeffy answered 2 years ago
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