Problem

1. Financial institutions have found themselves in short-run financial liquidity problems because of overexposure in the futures markets. Explain how this could happen if you took a "long position" in a foreign currency or a "long hedge" in a eurodollar deposit or CD.

2. Briefly explain the benefits that accrue to each of the contracting parties in a eurodollar interest rate swap. What is the difference between a normal swap and a basis swap? If a swap contract is signed and one of the parties wishes to return to his or her initial market position, for example, a floating rate, what, if anything, can be done?