How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 1-year, $5 million loan if loan rates and Eurodollar rates have the same volatility?
A) 1 contract
B) 5 contracts
C) 10 contracts
D) 20 contracts
E) 50 contracts

Question

Quizplus · Accepted Answer

To hedge a 1-year, $5 million loan using 90-day Eurodollar futures contracts, you divide the total amount by the size of one contract, which is typically $1 million. Since there are four 90-day periods in a year, you need 4 contracts to hedge each $1 million of the loan. Therefore, for a $5 million loan, you would need 5 x 4 = 20 contracts.

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