How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 6-month, $20 million loan if loan rates and Eurodollar rates have the same volatility?
A) 2 contracts
B) 4 contracts
C) 10 contracts
D) 20 contracts
E) 40 contracts

Question

Quizplus · Accepted Answer

Each Eurodollar futures contract is for $1 million and covers a 3-month (90-day) period. To hedge a 6-month, $20 million loan, the bank would need contracts covering two 3-month periods for the entire $20 million. This requires 20 contracts for the first 3 months and another 20 for the second 3 months, totaling 40 contracts.

How Many 90-Day Eurodollar Futures Contracts Should a Bank Purchase