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Q) Refer to the following CME Eurodollar futures information for Questions 2.1-2.5 ( There isn't any...

Q) Refer to the following CME Eurodollar futures information for Questions 2.1-2.5 ( There isn't any more information given by the professor)

Maturity Last

Jun' 15

 99.525   

Sep' 15

 99.335

Dec' 15

 99.11

2.1) What is the yield or interest rate for the Dec ’15 contract?

Your answer: _____________________%

(Keep four decimals)

2.2) What does the yield or interest rate for the Dec ’15 contract mean?

a. An annualized interest rate for the period from December 2015 to March 2016.

b. An annualized interest rate for the period from December 2015 to June 2016.

c. An annualized interest rate for the period from December 2015 to September 2016.

d. An annualized interest rate for the period from December 2015 to December 2016.

2.3) If you plan to make a short - term investment of $10 million for a period from June 2015 to September 2015, how do you hedge your exposure using Eurodollar futures?

a. Buy 10 Sep ’15 Eurodollar futures contracts.

b. Sell 10 Sep ’15 Eurodollar futures contracts.

c. Buy 10 Jun ’15 Eurodollar futures contracts.

d. Sell 10 Jun ’15 Eurodollar futures contracts.

2.4) If you plan to borrow a short - term loan of $10 million for a period from June 2015 to September 2015, how do you hedge your exposure using Eurodollar futures?

a. Buy 10 Sep ’15 Eurodollar futures contracts.

b. Sell 10 Sep ’15 Eurodollar futures contracts.

c. Buy 10 Jun ’15 Eurodollar futures contracts.

d. Sell 10 Jun ’15 Eurodollar futures contracts.

2.5) If you believe that the 3 - month Eurodollar interest rate in December 2015 will be more than 1%, how do you establish a position to bet on your expectation?

a. Buy Dec ’15 Eurodollar futures contracts.

b. Sell Dec ’15 Eurodollar futures contracts.

c. Buy Sep ’15 Eurodollar futures contracts.

d. Sell Sep ’15 Eurodollar futures contracts.

Solutions

Expert Solution

2.1) Yield or interest rate for the December 2015 contract is computed by the following formula:

Yield = (1-(Previous contract rate/December contract rate))*100*12/no. of months

= (1-(99.335/99.11))*100*12/3

= 0.9081%

2.2) a. Yield or interest rate for the Dec ’15 contract means annualized interest rate for the period from December 2015 to March 2016.

2.3) Since I am investing USD now, I shall be getting back USD on maturity and I need to protect myself from strengthening USD. Therefore, I will buy current month Eurodollar June 2015 contracts. Answer is (c).

2.4) Since I am borrowing in USD, I will have to repay USD at the end of the contract and need to protect myself from weakening USD. Therefore, I shall sell Eurodollar June 2015 contracts. Answer is (d)

2.5) if I believe interest rates to increase from current implied rate of 0.91% to 1%, it implies USD is going to depreciate. Therefore, I shall buy Eurodollar December 2015 futures. Answer is (a)

jeff jeffy answered 2 years ago
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