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Your company forecasts that 3 months after today you will need to borrow $5 million dollars...

Your company forecasts that 3 months after today you will need to borrow $5 million dollars for 3-months. You also know a Eurodollar futures contract that expires in 3 months (June) is trading at 98.08.   You decide to use this Eurodollar futures contract to hedge your risk.   If the actual LIBOR rate on the day when you borrow money, which is also the day that your Eurodollar futures position expires, is 1.3%.

(1) Indicate how you will use the Eurodollar futures contract to hedge your risk, including how many contracts, buy or sell?

(2) How much is your interest expense from the borrowing alone?

(3) How much is your payoff form futures position alone?

(4) How much is your effective interest rate for the borrowing with your hedging position combined?

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ekkarill92 answered 1 year ago
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