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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?

(im getting a second opinion on this, pls dont answer if uve alreadydid)

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Expert Solution

Since the lender is in the same position of a bond holder, he will have to take a short position in the futures market to offset his position. Hence, he should short futures.

Right now, the December Eurodollar futures contract has price 94. Hence, interest rate = 100 - 94 = 6%

Effective 3 months interest rate locked = 6% / 12 x 3 = 1.5%

Hence, the money the lender gets from the hedged position = Principal x interest rate differential = 10 x (1.5% - 1.2%) = £ 0.03 million = £ 30,000

jeff jeffy answered 2 years ago
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