Question: Your company has a $ 100 million variable rate debt outstanding and you are connected about higher debt payment from rising interest rates over next

Your company has a $ 100 million variable rate debt outstanding and you are connected about higher debt payment from rising interest rates over next 12 months. You decide to use Eurodollars future contracts to protect against rising interest rates. The current 12-month Eurodollar future contract interest rate is 1.5% LIBOR. Each contract is $1 million USD.

12 months later, the LIBOR. The LIBOR rate increases to 2%.

Questions:

a.How many contracts you will need to sell to hedge the interest rate risk?

b.What's the gain from the future contracts 12 months later?

c.How much higher interest payment 12 month later?

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