Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. 1. it is april 2019. a us company needs to borrow

1. It is April 2019. A US company needs to borrow $100,000,000 for three months starting...

80.2K

Verified Solution

Question

Finance

1. It is April 2019. A US company needs to borrow $100,000,000for three months starting five months from now. The current 3-monthLIBOR is 2.5%. The company is afraid that rates may rise duringthose five months before it obtains the loan. Should the companybuy or sell Eurodollar futures? And how many (ignoring the presentvalue of the basis point change)?

Which month should the futures settle/expire?

Assume that the appropriate Eurodollar future is trading at97.4. What interest does the company pay if the 3-month LIBOR ratefinishes at 95 (factoring in the gain/loss of the Eurodollarfutures contracts)? Or finishes at 98? Assume each month has 30days.

Answer & Explanation Solved by verified expert
3.9 Ratings (679 Votes)
This is a very interesting question and needs a thorough understanding of the Eurodollar futures to answer I will try to break down the concepts and explain the answer by logical steps The company needs to borrow the money in future The adverse impact for borrowing would be the interest rates going up Hence we need a hedging instrument that will protect against rising interest rate risk The instrument used here is the Eurodollar futures EDF The underlying for EDF is a Eurodollar time deposit which at the rate of 3months LIBOR We will need to shortsell the EDF to    See Answer
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

1. It is April 2019. A US company needs to borrow $100,000,000for three months starting five months from now. The current 3-monthLIBOR is 2.5%. The company is afraid that rates may rise duringthose five months before it obtains the loan. Should the companybuy or sell Eurodollar futures? And how many (ignoring the presentvalue of the basis point change)?Which month should the futures settle/expire?Assume that the appropriate Eurodollar future is trading at97.4. What interest does the company pay if the 3-month LIBOR ratefinishes at 95 (factoring in the gain/loss of the Eurodollarfutures contracts)? Or finishes at 98? Assume each month has 30days.

Other questions asked by students

Q

Olsen Outfitters Inc. believes that its optimal capital structure consists of 60% common equity and 40%...

Finance
Q

PATENT LAW: True or False. A patent pending status does not give an inventor the status...

General Management
Q

Heights for group of people are normally distributed with mean = 63 inches and standard deviation...

Basic Math
Q

Epidermal ridges are responsible for the shape of your O stretch marks O fingerprints Ohairline...

Biology
Q

29 A mild steel wire of length 2 meter cross sectional area A m is...

Physics
Q

Sketch a graph with a line of symmetry of at 2 a range of y...

Geometry
Q

bL d b d please list every law use

Algebra
Q

Bronson Industries reported a deferred tax liability of $8.5 million for the year ended December...

Accounting
Q

Este enfoque incorpora los impactos futuros esperados de una decisin en el anlisis: A....

Accounting
Q

9.12. Given the following average demand for each month, calculate the seasonal indices for each...

Accounting
Q

Are the best salespeople born that way or trained to be that way? Clearly some...

Accounting
Q

Waterways has two major public park projects to provide with comprehensive irrigation in one of...

Accounting