A financial institution wants to hedge against a rise in interest rates (i.e. a fall in prices) for a money market portfolio that it holds of $20 million. The FI decides to hedge with Eurodollar Future Contracts, with a minimum contract of $ 1 million. The hedge ratio that will be used is .95.
How many futures contracts should the FI get, and what should the position be (long or short)?

Question

Quizplus · Accepted Answer

# of contracts = [$20 million / $1 mil.] x .95 = 19 
Should get a short futures position to make a gain if T-bill prices fall (i.e. rates rise).

A Financial Institution Wants to Hedge Against a Rise in Interest