In: Finance
Eurodollar futures have a payoff as below:
An investor who wants to lock in the rate of interest paid would buy a Eurodollar future. If the interest rates rise, the gain from the Eurodollar future would offset the increased interest expense. If interest rates fall, the loss from the Eurodollar future would offset the decreased interest expense. In either situation, the investor has locked into a rate of interest based on the price of the Eurodollar future
Number of contracts to trade = note amount / notional value of Eurodollar future
the underlying notional value of a Eurodollar future is $1 million
Number of contracts to trade = $25 million / $1 million
Number of contracts to trade = 25
As the note is of 9-month maturity, the investor should trade the 9-month Eurodollar futures