Question

Suppose we wish to borrow $100 million for 90 days beginning next June, and that the quoted Eurodollar futures price is 95.

(a) What is the annualised 3-month LIBOR rate beginning next June implied by the future price today?

(b) Do you take long or short positions in the Eurodollar futures contract?

(c) Suppose on the settlement day, the futures price is 96. What is the profit/loss of your futures position?

Answer 1

90 days Eurodollar futures has Eurodollar as underlying these contracts are of $ 1 million face value and is traded on an index price basis. In index price basis, in which the contract is quoted as 100 minus the annualised LIBOR.

A). in our sum index price is 95 hence the annualised eurodollar rate is 100-95 = 5% answer

so our 90 day rate becomes 5%*(90/360) = 1.25%

b). Euro dollar is a time deposit having a face value ( or principal value) of $ 1 million, with a 90 day maturity. As we want to borrow, we need to short the eurodollar

C). on setelment date, annualised eurodollar rate is 100 -96 = 4%. so 90 days rate is 4%*(90/360) = 1%

the number of contracts needed are $100 million/$1 million ( Total amount/ the size of a single contract) =100 contracts

The eurodollar Contract is designed in such a way that for a short contract , decrease in 1 basis point would result in a loss of $ 25 per contract. hence in our case there is a fall in 100*(1.25%-1%) = 25 bsp

So the net loss on our position is 100*25*$25 = $ 62,500