4. Suppose we wish to borrow $600,000,000 for 91 days at LIBOR beginning next Se
ID: 2620142 • Letter: 4
Question
4. Suppose we wish to borrow $600,000,000 for 91 days at LIBOR beginning next September. In this case, we might want to hedge against a potential ______ in interest rates between now and September by taking a _____ position in Eurodollar futures
b.decrease ... long
c. increase ... long
d.decrease ... short
5. Suppose we wish to borrow $9,000,000 for 91 days at LIBOR beginning next June, and that the quoted Eurodollar futures price (based on a 360-day year) is 92.72. How much will be needed to repay the loan?
b. $9,655,200
c. $9,706,644
d. $9,317,337
e. $9,331,240
Explanation / Answer
4.
Suppose we wish to borrow $600,000,000 for 91 days at LIBOR beginning next September. In this case, we might want to hedge against a potential Increase in interest rates between now and September by taking a short position in Eurodollar futures.
Option (A) is correct answer.
5.
Quoted interest rate = 1 - (92.72 / 100)
= 7.28%
Interest rate for 360 days is 7.28%
Interest rate for 91 days = 7.28% × (91 / 360)
= 1.84%.
Quoted interest rate for 91 days is 1.84%.
Value of loan = $9,000,000
Total Repayment after 91 days = $9,000,000 × (1 + 1.84%)
=$9,165.,620.
Total Repayment in 91 days will be $9,165,620.
Option (A) is correct answer.
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