hi David,
here is an example question from FRM Handbook
a corporate treasurer wants to hedge a July 17 issue of $5 million of
commercial paper with a maturity of 180 days, leading to anticipated proceeds of
$4.52 million. The September Eurodollar futures trades at 92, and has a notional
amount of $1 million.
Compute
a. The current dollar value of the futures contract
b. The number of contracts to buy/sell for optimal protection
Answer
a. The current dollar price is given by $10,000[100 − 0.25(100 − 92)] =$980,000. -> why 10,000 notional amount?
Note that the duration of the futures is always three months
(90 days), since the contract refers to three-month LIBOR.
b. If rates increase, the cost of borrowing will be higher. We need to offset this by
a gain, or a short position in the futures. The optimal number is from Equation
N = - (180*4,520,000) / (90*980,000) = -9.2 -> why 4,520,000 is used instead of 5million?
thanks!!
suk
here is an example question from FRM Handbook
a corporate treasurer wants to hedge a July 17 issue of $5 million of
commercial paper with a maturity of 180 days, leading to anticipated proceeds of
$4.52 million. The September Eurodollar futures trades at 92, and has a notional
amount of $1 million.
Compute
a. The current dollar value of the futures contract
b. The number of contracts to buy/sell for optimal protection
Answer
a. The current dollar price is given by $10,000[100 − 0.25(100 − 92)] =$980,000. -> why 10,000 notional amount?
Note that the duration of the futures is always three months
(90 days), since the contract refers to three-month LIBOR.
b. If rates increase, the cost of borrowing will be higher. We need to offset this by
a gain, or a short position in the futures. The optimal number is from Equation
N = - (180*4,520,000) / (90*980,000) = -9.2 -> why 4,520,000 is used instead of 5million?
thanks!!
suk