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Question 8.P.12: You hedged your financial firm’s exposure to increasing inte...

You hedged your financial firm’s exposure to increasing interest rates by buying one December put on Eurodollar deposit futures at the premium quoted on April 15, 2008 (see exhibit 8-4).

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a. How much did you pay for the put in dollars if you chose the strike price of 977,500?

 

Value of the put: 19.25 x $25 = $481.25

 

b. If December arrives and Eurodollar Deposit Futures have a settlement index at expiration of 96.50, what is your profit or loss? (Remember to include the premium paid for the put option).

 

Payout from settlement: (977,500-965,000) = 12,500 basis point x $25 = $ 312,500

 

Net Gain: $312,500 – $481.25 = $312,018.75

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