03 Jun Question I.I a. A corporation anticipates it will require a $100 million loan for a 90-day period beginning in 6
Question
I.I
a. A corporation anticipates it will require a $100 million loan for a 90-day period beginning in 6
months that will be based on 3-month LIBOR rates plus some fixed premium.
The corporation is concerned that rates may rise before the loan is needed and that it will, therefore,
be required to pay higher interest rates. Using Eurodollar futures contracts what is the hedge ratio?
Hint(ED futures contract is for $1,000,000)
I.II
1.
It is November 1,2014. Youre a grain producer who plans to borrow approximately
$1,000,000.00 next March 14, 2015 to finance seed, fertilizer, and operations for spring planting. You
intend to repay the loan 3 months later on June 14,2015
Your bank agrees to a loan rate of 3M LIBOR plus 100 basis points (3M LIBOR + 1 percent).
That is, your bank sets the interest rate to 3M LIBOR on the day you take out the loan ( March 14,2015)
adding 1 percent to the LIBOR baseline.
a. Find what 1 ED futures equals, what the hedge ratio is and if your hedge is short or long
(Hint: our in class example was gaining interest on a deposit, here we are taking out a loan)
b. Suppose that when you arrange the loan and then hedge its forward interest rate exposure in
November 15 2014, find the March 2015 ED futures price on November 14,2014
http://www.cmegroup.com/trading/interest-rates/stir/eurodollar.html
c. Find the 3M forward LIBOR rate from the ED futures price in b.
(Hint this is in % per annum therefore you must bring to decimal, i.e. 0.35% =0.0035)
d. If the forward rate increase what happens to the ED futures price?
e. Suppose that ED futures for March 2015 were to expire on March 14 at a price 99.235, find
the3M forward LIBOR rate.
f. Did the ED futures price increase or decrease? By how much, by how many bp?
Hint( 1bp = 0.01)
2 . Fill in the figure to
a. find the profit/loss from the futures
b. interest paid during loan from March 14,2015 to June 14,2015
c. Net cost to borrow
d. rate of borrow
e. Is your rate of borrow equal to the rate to borrow on Nov 15, 2014
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