Problem 2 (20 points)

Month Open High Low Last Change Settle Estimated Prior Day Volume Open Interest

20-Oct 98.98 98.99 98.88 98.8925 -0.08 98.91 115,807 514,892

20-Nov 99.27 99.275 99.135 99.19 -0.105 99.19 88,625 136,818

20-Dec 99.45 99.455 99.36 99.415 -0.045 99.415 343,832 1,575,169

a)John Jones wants to hedge a floating rate interest payment on a $3.2 million loan.The next quarterly interest payment is determined according to a 3-month LIBOR on Nov 1, 2020.How could he use Eurodollar futures to do it (long/short, how many contracts, contracts maturity)?

b)If he entered into the futures position at Monday close of 99.25, what would be his cash flow due to marking to market on Tuesday and on Wednesday?

c)What is the value of his futures position on Monday?

d)If on Nov 1, 2020 the 3-month LIBOR turns out to be 1% p.a., Eurodollar futures price 99.05, what would be the total cost to John Jones taking into account gains/losses on his hedge, plus the interest payment (disregard time value of money)?