The 3-month December 2023 futures contract on the euro interest rate currently sells for 96.00 with a nominal contract value of 1,000,000 euros?

(i) What is the seller of this futures contract agreeing to?

(ii) Your expectation for the 3-month interest rate on the euro is 2% When December comes, would you buy or sell this contract? Why or why not?

(iii) How much profit in euros would you make if your expectation was correct in part ii?

(iiv) What would be the 3-month euro interest rate in December 2023 be a break-even position for the buyer?

(v) Assuming 3-month euro interest rate in December 2023 is 5%, What is the profit/loss of the seller?

Answer rating: 100% (QA)

i Lockin interest rate of the 3month December 2022 futures contract 100futures price 1009600 400 Therefore the seller of the interest rate futures is agreeing to borrow a nominal value of 1 million dollars at a fixed rate of 400 for the following 3 month period in December 2022 ii Current price of 3month December 2022 futures contract 9600 3month interest rate in December 2 Therefore price of the futures contract in December 1003month interest rate in December 100200 98 Since price of the futures contract increases if interest rate is 2 in December we should buy the futures contract now iii Nominal value V 1000000 Increase in futures price December futures price Current price 98009600 200 Therefore incremental interest rate i 200 Period T 3 months Therefore profit ViT12 1000000200312 500000 iv For break even the futures price in December should be same as it is now Therefore futures price in December 2022 9600 Required interest rate 100futures price in December 2022 1009600 400 Therefore 3month dollar interest rate in December 2022 is 400 v Lockin interest rate of the futures contract 10000price of the future contract 100009600 400 The ... View the full answer