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You expect interest rates to continue to rise and you want to lock in the rate you'll pay on a $50 million short-term loan you plan to take out at the beginning of the third quarter. You take a short position on the June Eurodollar contract, which settled at 97.775 today. Assume on June 18, when the contract expires, it settles at 97.545. Two weeks later you borrow the $50 million at the three-month LIBOR rate, which is at 2.468%. Show that your effective annual borrowing rate is close to what the contract implied when the loan is repaid at the end of September.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92811867

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