## Forward and future quiz 2 - Eurodollar Futures

naresh.thkr
Good Student
Posts: 25
Joined: Sat Aug 11, 2012 7:02 pm

### Forward and future quiz 2 - Eurodollar Futures

Roughly how many three-month LIBOR Eurodollar futures contracts are needed to hedge a position in a \$200 million, 5-year receive-fixed swap?
a. Long 250
b. Short 3,200
c. Short 250
d. Short 40,000
The correct answer is short 3,200.

The dollar duration of a 5-year 6% par bond is about 4.3 years. Hence the DVBP of the position is about \$200,000,000 × 4.3 × 0.0001 = \$86,000. That of the futures is \$25. Hence the ratio is 86,000/25 = 3,440.

Is question incomplete? Can anyone give a try.

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

### Re: Forward and future quiz 2 - Eurodollar Futures

Hi.
This question is correct.
You need to know duration hedging to answer the question.
The total risk of the swap should equal to the total risk of the euro-dollar futures.

The duration of a par 5 year swap is 4.4 years. You can get the answer also by using my duration approximation formula = 75% of maturity.. That gives 3.75 years. (the options give me enough room for approximations when duration not given in the question).

Now PVBP of the swap = 3.75 (using approximation) * 200 M = 75,000.

Eurodollar futures are highly standardized contract. The face value is always \$1M, the tenure is always 3 months. PVBP = \$25 (always).. this is a very important concept so remember it for the exam...

Number of eurodollar contracts = 75000/25 = 3,000..

naresh.thkr
Good Student
Posts: 25
Joined: Sat Aug 11, 2012 7:02 pm

Naresh.