1) suppose we wish to borrow $40,000,000 for 91 days at LIBOR beginning next Dec

Question

1) suppose we wish to borrow $40,000,000 for 91 days at LIBOR beginning next December, and that the quoted Eurodollar futures price (based on a 360-day year) is 93.47. How much will be needed to repay the loan?

$40,660,256

$42,612,000

$41,320,511

$42,794,480

$40,846,181

2)

Suppose we wish to borrow $6,000,000 for 91 days at LIBOR beginning next March. In this case, we might want to hedge against a potential ______ in interest rates between now and March by taking a _____ position in Eurodollar futures

decrease ... long

increase ... short

decrease ... short

increase ... long

1) suppose we wish to borrow $40,000,000 for 91 days at LIBOR beginning next December, and that the quoted Eurodollar futures price (based on a 360-day year) is 93.47. How much will be needed to repay the loan?

$40,660,256

$42,612,000

$41,320,511

$42,794,480

$40,846,181

2)

Explanation / Answer

1) Answer : a. $40,660,256

=> Libor increase in interest rate for 91 days= (100 - 93.47) * 91 / 360 = 1.650638808%

Interest after the 91 days = 40000000 * (100 + 1.650638808) % = $40660255.52 or 40660256

2) Answer : d. increase ... long

=> This is because any increase in the Libor rate will be cared off by taking a long position and square-up the long position when payment has to made at the end of 91 days.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.