Your firm plans on issuing 10,000 pure discount (no-coupon) notes with two years to maturity. Each note has a face value of $1000. The current yield to maturity on two-year notes like these is 10% per annum. You believe that if the Eurodollar futures yield changes by 10 basis points, the change in the required rate of return (yield to maturity) on the notes will be 7 basis points. The mark-to-market cash flow is $25/basis point for Eurodollar futures, which means the gain or loss on one Eurodollar futures contract for one-basis-point interest rate movement is $25.

Use the principles of dollar equivalency method to compute the proper number of Eurodollar futures contracts to trade in order to hedge the planned issuance of the notes. Will you buy or sell futures contracts?

Answer rating: 100% (QA)

To hedge the planned issuance of the notes we need to determine the number of Eurodollar futures con... View the full answer