How Many 90-Day Eurodollar Futures Contracts Should a Bank Purchase

question 57

Multiple Choice

How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 1-year, $5 million loan if loan rates and Eurodollar rates have the same volatility?

• A) 1 contract
• B) 5 contracts
• C) 10 contracts
• D) 20 contracts
• E) 50 contracts

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Definitions:

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, calculated as current assets divided by current liabilities.

Net Plant

The total value of a company's property, plant, and equipment minus accumulated depreciation, representing the net book value of physical assets used in operations.

Operating Cycle

This refers to the period of time it takes for a business to purchase inventory, sell products, and receive cash from sales.

Sales on Account

Transactions in which goods or services are sold but payment is deferred, creating accounts receivable for the seller.