A company borrows $35 million for one year at an interest rate of 6-month LIBOR plus 1.5%
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Question:
A company borrows $35 million for one year at an interest rate of 6-month LIBOR plus 1.5% in July. The interest has to be paid at intervals of six months. The company would like to hedge the interest rate risk relating to the second interest payment, which would be due in June the following year. The interest payment would be determined by the 6-month LIBOR in January but has to be paid at the end of June. The company decides to trade in Eurodollar futures and the current quote at this time is 94.15. If the Eurodollar futures contracts are closed out at the price of 92.95, what is the profit earned on Eurodollar futures assuming that the correct number of contracts were traded?
A. $176,000
B. $198,000
C. $213,000
D. $235,000
E. $249,000
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