You plan to borrow $1,000,000 for six months (183 days)in six months' time (182 days).The current Libor rate for six months is 6%.You want to hedge your interest-rate exposure by using 90-day eurodollar futures contracts that mature in six months.Using PVBP analysis,how 90-day eurodollar futures contracts are needed for this hedge?

Question

Quizplus · Accepted Answer

To hedge the interest-rate exposure, you need to calculate the price value of a basis point (PVBP) for the loan and the futures. The PVBP for the loan is calculated as $1,000,000 * 0.0001 * (183/360) = $50.83. The PVBP for a 90-day eurodollar futures contract is $25. Therefore, the number of contracts needed is $50.83 / $25 = 2.0332, which rounds to approximately 1.92 contracts.

You Plan to Borrow $1,000,000 for Six Months (183 Days)in