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Compute the dollar profit or loss from borrowing

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On October 1, the one-month LIBOR rate is 4.50 percent and the two-month LIBOR rate is 5.00 percent. The November Fed funds futures is quoted at 94.50. The contract size is $5,000,000. Remember to briefly discuss your results.

a. The dollar value of a one basis point rise in the Fed funds futures price is how much and why?

b. Compute the dollar profit or loss from borrowing the present value of $5,000,000 at one-month LIBOR and lending the same amount at two-month LIBOR while simultaneously selling one November Fed funds futures contract. Assume that rates on November 1 were 7 percent, there is no basis risk, and the position is unwound on November 1.

Reference no: EM132558749

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