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Answer: Short three contracts for a gain of $7,500
A borrower who wants to hedge against **rising LIBOR** should take the **short** side of the Eurodollar futures contract, because the short position gains when the futures price falls. - Quote moves from **98.00** to **97.00** when LIBOR rises from 2.0% to 3.0% - Price change = **1.00 point** - Each 1.00 point = **$2,500** per contract - For **3 contracts**: \(3 \times 2{,}500 = 7{,}500\) So the trade is **short three contracts**, with a gain of **$7,500**.
Author: Manit Arora
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Question 172.2. A company plans to borrow $3.0 million for three months starting in one year. The Eurodollar futures contract that matures in one year has a quoted price of 98.00 and the company wants to (net) effectively lock-in this 2.0% LIBOR interest rate. At the end of one year, LIBOR increases to 3.0%. The company’s borrowing (at the higher 3.0% LIBOR) will increase but will be hedged by the gain on the Eurodollar futures contract. What is the futures trade and what is the gain on the futures contract only?
A
Long one contract for a gain of $2,500
B
Long three contracts for a gain of $7,500
C
Short one contract for a gain of $2,500
D
Short three contracts for a gain of $7,500
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