Cash and futures markets

1-A corporation anticipates borrowing $100 million in 1 month for 90 days at 3 month LIBOR + a fixed premium of 1%

( a) The Eurodollars futures contract is currently selling at 95 at time t=0. What is the corresponding 3 month LIBOR?

(b) What should I do with the futures (buy or sell) to hedge?

(c) Let’s say in 1 month, 90 day LIBOR is 6% per year, what is the interest expense to the company from rolling over the liability at the borrowing rate for 90 days?

(d) What is the gain or loss on the futures contracts assuming the contract price is 96?

(e) What is the net borrowing cost to the company including both the gain or loss on futures and the interest expense?

2-A UAE company wants to use a forward contract to hedge exchange rate risk. It is an importer who needs to pay an A/P of EUR 1M (denominated in Euros) in 1 month. The current spot rate is 4 AED per 1 Euro. A forward contract with a rate of AED 4.2 per 1 Euro is available. What is the company’s AED cost to buy the necessary Euros if it hedges with the forward contract?

3-A company manufactures silk and for this company, silkworms are a factor of production. They want to hedge the risk that the price of silkworms will go up. They decide to hedge with a silkworm futures contract. The contract specifies 100 KG of silkworms The company must buy 1000 KG of silkworms next month. The correlation between returns on silkworms and silkworm futures is 80%. The volatility of silkworm returns is 30%. The volatility of worm futures contracts is 35%. The contract is cash settled. The current silkworm futures price is $2.00 per KG.

(a) Will you buy or sell contracts at t=0?

(b) How many contracts will you transact?

(c) Let’s say that day you go to buy silkworms in the market, the spot silkworm price is $2.05 per KG of worms. The futures price that day is $2.08/KG of worms.

What do you do in the cash market that day?

What do you do in the futures market?

Do you have a gain or loss on futures?
What is your net cost to buy the worms?