Consider the same facts as the previous problem, only nowconsider hedging with the 3-month Eurodollar futures. Suppose
Question:
a. What issues arise in using the 3-month Eurodollar contract to hedge a 150-day loan?
b. If you wish to hedge a lending position, should you go long or short the contract?
c. What 3-month LIBOR is implied by the Eurodollar futures price? Approximately what lending rate should you be able to lock in?
d. What position in Eurodollar futureswould you use to lock in a lending rate? In doing this, what assumptions are you making about the relationship between 90-day LIBOR and the 150-day lending rate?
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a We face the classic problem of asset mismatch We are interested in locking in an interest rate for ...View the full answer
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