Problem 1: Your firm also believes that the US economy is going to prove stronger than many anticipate. However you also believe that the Federal Reserve is going to be slow to raise the federal funds target but later is going to be forced to raise the rate aggressively. Currently, the June 2016 Eurodollar futures (EDM) contract is pricing a 3-month Eurodollar rate of .545 percent and the June 2019 Eurodollar futures (EDM9) contract is pricing a 3-month Eurodollar rate of 1.95 percent. Your view is that market expectations will change in favor of your view over the next few months so you want to put on a spread trade in these contracts. You want to size your bet so that you make $1 million if the spread moves 20 basis points in your favor (and on the flip side are willing to lose $1 million if the spread moves 20 basis points against you). You want to set up your position so that if the spread does not change, you neither make nor lose money on the trade.

a. Determine the number of contacts for each instrument that you want to go long or short and indicate which instrument you are buying and shorting. Show calculations.

b. Verify that if the speared moves in your favor by 20 basis points you will make $1 million.

c. Verify that if the spread moves against you by 20 basis points you.