Determine how many contracts the bank should trade

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A bank plans to hedge using three month Eurodollar futures contracts based on $ 1 million in principal. Determine how many contracts the bank should trade (its hedge ratio) in the following situations:

a. The bank will roll over $ 125 million in six month CDs in four months. The Eurodollar futures rate moves 1.5 times as much as the CD rate.

b. In three months, the bank will roll over $ 50 million in one month loans. The loan rates move 1 to 1 with Eurodollar futures rates.

c. In six months, the bank will extend $ 5 million in floating rate loans tied to the Eurodollar cash rate. The futures and cash rates move 1 to 1.

Reference no: EM13884524

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