Moon Bank is to extend a one-year new loan of $20 million to one of its clients over the next week. However, the management expects a decrease in market interest rates. Currently loans can be allocated to customers at a promised interest rate of 4%, but management is fearful that loan interest rates may decrease by 1% at the time of allocating the new loan. To offset the potential loss managers could purchase 10 contracts of 60-day Eurodollar futures trading at an MMI Index of 93.9, and then within next 60 days sell 10 contracts of 60-day Eurodollar futures trading at an MMI Index of 96.7. 

a- Calculate the potential loss following a decrease in interest rates. 

b- Calculate the potential gain following trading futures. 

c- Calculate the overall return. 

d- Explain what would happen if the expectation about interest rates does not come true and interest rates increase.

Answer rating: 100% (QA)

a The potential loss following a decrease in interest rates would be 200000 This is calculated by ta... View the full answer