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FRM Part I · FRM Exam Part I · Interest Rates

A treasurer expects to borrow USD 10 million for 3 months starting in 6 months and fears rates will rise. Which position in Eurodollar/SOFR-type interest rate futures best hedges this exposure?

The treasurer should sell the interest rate futures. Futures prices equal 100 minus the implied rate, so when rates rise the price falls and the short position gains, offsetting the higher cost of the future borrowing.

  1. ABuy futures contracts, because rising rates lower futures prices and generate gains
  2. BSell futures contracts, because rising rates lower futures prices and generate gains on the short positionCorrect
  3. CSell futures contracts, because rising rates raise futures prices
  4. DBuy futures contracts, because rising rates raise futures prices

Explanation

Futures prices are quoted as 100 minus the rate, so a rate rise lowers the price. A short position gains when prices fall, offsetting higher borrowing cost. Buying would add to losses.

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