The current time 15 September 15, 2008. The manager of a $500 million short-term loan portfolio...

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The current time 15 September 15, 2008. The manager of a $500 million short-term loan portfolio would like to use Eurodollar futures to hedge uncertainty of interest receipts. The interest rate on all loans in the portfolio is reset every 90 days at LIBOR plus 55 basis points. The next interest receipt on October 1 is already known, being determined by the 90-day LIBOR rate on July 1 of 5.85%. However, the interest receipt on January 1. 2009 is uncertain, because it is determined by the 90-day LIBOR rate on October 1. The 90-day Eurodollar futures price quotes on September 15 are December, 2008 94.05 March. 2009 93.92 June, 2009 93.86 Answer the following questions a. Compute the optimal number of Eurodollar futures contracts the bank loan portfolio manager must establish a position in on September 15 to hedge LIBOR uncertainty on October 1. Be sure to clearly indicate which Eurodollar contract expiration month should be used and whether the position should be short or long. b. Suppose on October 1 the 90-day LIBOR rate turns out to be 6.25% and the Eurodollar futures price quotes turn out to be 7 December. 2008 93.66 March, 2009 93.45 June, 2009 93.15 Show that the gain/loss of interest receipts as a result of LIBOR increasing from 5.85% to 6.25% is offset by the loss/gain on the Eurodollar futures position that you established in part a. The current time 15 September 15, 2008. The manager of a $500 million short-term loan portfolio would like to use Eurodollar futures to hedge uncertainty of interest receipts. The interest rate on all loans in the portfolio is reset every 90 days at LIBOR plus 55 basis points. The next interest receipt on October 1 is already known, being determined by the 90-day LIBOR rate on July 1 of 5.85%. However, the interest receipt on January 1. 2009 is uncertain, because it is determined by the 90-day LIBOR rate on October 1. The 90-day Eurodollar futures price quotes on September 15 are December, 2008 94.05 March. 2009 93.92 June, 2009 93.86 Answer the following questions a. Compute the optimal number of Eurodollar futures contracts the bank loan portfolio manager must establish a position in on September 15 to hedge LIBOR uncertainty on October 1. Be sure to clearly indicate which Eurodollar contract expiration month should be used and whether the position should be short or long. b. Suppose on October 1 the 90-day LIBOR rate turns out to be 6.25% and the Eurodollar futures price quotes turn out to be 7 December. 2008 93.66 March, 2009 93.45 June, 2009 93.15 Show that the gain/loss of interest receipts as a result of LIBOR increasing from 5.85% to 6.25% is offset by the loss/gain on the Eurodollar futures position that you established in part a.

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Answer a To hedge the uncertainty of interest receipts on October 1 the bank loan portfolio manager should establish a position in Eurodollar futures First we need to calculate the number of contracts ... View the full answer