Explanation:
The change in the value of the instrument for a 1-basis point parallel shift in the interest rate is:
We know that the interest rate per three months changes by 0.0025%, which is equivalent to USD 25 on a principal of USD 1 million. In other words, a Eurodollar contract is designed in such a way that one basis point (0.01) move in the futures price leads to a profit or loss of $25.
Thus, the number of three-month Eurodollar futures contracts necessary to hedge the nine-month interest is:
Q.4926 Suppose that a nine-month interest is expected to be paid on a USD 30,000,000 bond. Suppose further that three-month Eurodollar futures contracts are used to hedge the nine-month interest and that the nine-month period starts at the maturity of the futures contract that will be used. How many three-month Eurodollar futures contracts are necessary to hedge the nine-month interest? (Ignore the differences between Eurodollar futures and FRAs)
A
30
B
45
C
90
D
60
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