A corporate treasurer would like to use 3-month Eurodollar futures contracts to lock in the rate...
- A corporate treasurer would like to use 3-month Eurodollar futures contracts to lock in the rate of interest paid by the corporation on a one-year $100 million floating rate note which will be issued in 3 months. Assume that Eurodollar futures contracts which mature in 3 months, 6 months, 9 months, and 12 months are traded. How many contracts should the treasurer trade? Which maturities should the treasurer choose?
Homework Answers
Ans
As 1 euro-dollar future contract is of $1 million and the corporation is issuing $100 million issue the treasurer needs to sell 100 contracts of euro_ dollar contract .
Now since the security note is floating rate note which means the future inerest rate will change as per the prevalent market rate,the treasurer needs to hedge risk of interest for next 3 months only .So the treasurer should short sell 100 contracts of euro_dollar futures nearest 3 month expiry contract in order to hedge against interest rate fluctuations.
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