A bank anticipates it will need to borrow funds in the Eurodollar market in the future. It hedges by selling futures contracts. If rates decline, which of the following is true?
A) The bank will profit on the futures contract.
B) The bank will profit in the cash market.
C) The bank will have locked in a low cost of borrowing.
D) The bank will lose in the cash market.
E) Both a. and d. are true.

Question

A bank anticipates it will need to borrow funds in the Eurodollar market in the future. It hedges by selling futures contracts. If rates decline, which of the following is true?
A) The bank will profit on the futures contract. 
B) The bank will profit in the cash market.
C) The bank will have locked in a low cost of borrowing.
D) The bank will lose in the cash market.
E) Both a. and d. are true.

Quizplus · Accepted Answer

The Answer of A bank anticipates it will need to borrow funds in the Eurodollar market in the future. It hedges by selling futures contracts. If rates decline, which of the following is true?
A) The bank will profit on the futures contract. 
B) The bank will profit in the cash market.
C) The bank will have locked in a low cost of borrowing.
D) The bank will lose in the cash market.
E) Both a. and d. are true.

A Bank Anticipates It Will Need to Borrow Funds in the Eurodollar