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November 19 2019 An institution expects to collect $100 million in receivables in 4 months (March 19 and plans to invest that money at LIBID for the 92 day period running from March

November 19, 2019 An institution expects to collect $100 million in receivables in 4 months (March 19) and plans to invest that money at LIBID for the 92 day period running from March 19 to June 19. The institution views today's deposit rates as favorable and would like to lock in a forward deposit rate. Market Data for November 19th: 4 month LIBID 5-month LIBID 7-month LIBID 2.00% 2.25% 2.50% 1. Is the institution hurt or helped by rising interest rates? How many Eurodollar futures would you buy or sell on 11/19 to hedge the exposure? Suppose 2 months pass with no change in the LIBID yield curve (i.e., 4mo = 2%, 5mo = 2 1/4%, 7mo = 2 1/2%). What is the correct hedge ratio now? 3. What are the main risks in the hedge?

Aug 16 2020 View more View Less

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