Question

Suppose that it is February 20 and a treasurer realizes that on July 17 the company will have to issue $5 million of commercial paper with a maturity of 180 days. If the paper were issued today, the company would realize $4,820,000. (In other words, the company would receive $4,820,000 for its paper and have to redeem it at $5,000,000 in 180 days’ time.) The September Eurodollar futures price is quoted as 92.00. How should the treasurer hedge the company’s exposure?

Answer 1

it is near 10 contracts should be shorted

Step-by-step explanation:

given data

issue = $5 million

maturity time = 180 days

today realize = $4,820,000

redeem at maturity = $5,000,000

Eurodollar futures price = 92

solution

as company treasurer can hedge exposure by shorting Eurodollar

if rates rise Eurodollar futures position lead to profit

here time of commercial paper is twice of Eurodollar deposit

so contract price of a Eurodollar futures contract = 980,000

so no of contracts that shorted will be

no of contracts =
`(4820000)/(980000)` × 2 ..............1

no of contracts = 9.34

it is near 10 contracts should be shorted