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What is the appropriate hedge ratio

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Suppose it is currently May 23, 2008, and your firm will need to borrow $100 million on June 19 until October 5. You can borrow at the prevailing 90-day LIBOR plus 150 basis points. The current June Eurodollar futures price is 90.65. Assume that all funds are received immediately. 

  • Construct a hedge that will lock in your borrowing rate. What is the appropriate hedge ratio?
  • Suppose the 90-day LIBOR is either 7% or 10% on June 19.  Show your net interest cost under both scenarios.     

Intuitively, why do you get this result?

Reference no: EM133253212

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