The December Eurodollar futures contract is quoted as 98.40 anda company plans to borrow $8million for three months starting in December at LIBOR plus 0.5%.
(a) What rate can then company lock in by using the Eurodollar futures contract? Long or short the Eurodollar futures contract? How many contracts?
(b) What position should the company take in the contracts?
(c) If the actual three-month LIBOR turns out to be 1.3% with quarterly com-pounding, How would explain that the company can borrow at the lock-in rate in part (a)?
Ignore timing mismatches between the cash flows from the Eurodollar futures contract and interest rate cash flows.