Moon Bank is to extend a one-year new loan of $20 million to one of...
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Moon Bank is to extend a one-year new loan of $20 million to one of its clients over the next week. However, the management expects a decrease in market interest rates. Currently loans can be allocated to customers at a promised interest rate of 4%, but management is fearful that loan interest rates may decrease by 1% at the time of allocating the new loan. To offset the potential loss managers could purchase 10 contracts of 60-day Eurodollar futures trading at an MMI Index of 93.9, and then within next 60 days sell 10 contracts of 60-day Eurodollar futures trading at an MMI Index of 96.7. (6 marks) a- Calculate the potential loss following a decrease in interest rates. b- Calculate the potential gain following trading futures. c- Calculate the overall return. d- Explain what would happen if the expectation about interest rates does not come true and interest rates increase.
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