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FRM Part I · FRM Exam Part I · Interest Rate Futures

A treasurer expects to borrow $50 million for 3 months starting when a Eurodollar futures contract expires in six months. The futures quote is 95.00. To hedge the borrowing cost, the treasurer should short the appropriate number of contracts. If at expiry the quote is 94.00 and actual 3-month LIBOR equals the futures-implied rate, what is the futures gain, and how many contracts are needed?

The treasurer shorts 50 contracts and gains $125,000. The quote drops 100 basis points, each worth $25 per contract, giving $2,500 per contract, or $125,000 on 50. That equals the extra borrowing cost of 1% on $50 million for a quarter.

  1. AGain $125,000 on 50 short contractsCorrect
  2. BLoss $125,000 on 50 short contracts
  3. CGain $500,000 on 50 short contracts
  4. DGain $125,000 on 200 short contracts

Explanation

Number of contracts = $50m / $1m = 50. The quote falls 100 basis points, each worth $25, so each short contract gains 100 x $25 = $2,500. Across 50 contracts the gain is $125,000. This offsets the higher borrowing cost: 1% x $50m x 0.25 = $125,000. The $500,000 option omits the quarter factor.

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