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I don’t get why instead of entering with an FRA, we enter into a Eurodollar Future Contract to hedge an interest rate risk. Like whats the advantage of one versus the other
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In the derivatives, for some of the examples they show that XYZ is receiving some future and would like to invest them so they hedge their interest rate. What confuses me is why do they invest at the current rate and then in addition to that, they enter into a eurodollar future contract to hedge the rate? If you have already invested today, what exactly are you hedging against by entering as well into the eurodollar future contract
Where, exactly, is the question?
Are you asking the difference between an OTC and exchange traded derivative?
volume 2, reading 9, page 89 example 3.
What is throwing me off is that they locked in the rate of 2.4% today. After 2 months, he is investing at the market rate which is 2.1% and then they are showing the calculation of the profit and loss on the eurodollar contract to show that they locked in the rate.
But for instance, if we had used a FRA to lock in our investment rate, we would have used the FRA rate as per the contract to invest and then calculate the value at the expiry, like the difference of the rates we locked in and the one at time today. But with eurodollar , it seems different.
The way I was tacking this problem was calculating how much he was gaining on the eurodollar contract by comparing 2.4% to 2.1% and just getting the profit amount on this contract. I didn’t calculate how much we were getting on the 2.1% because thats not the rate he locked in
I already know the difference between an OTC product and an exchange-traded product. The thing that I wasn’t sure if Eurodollar Future Contracts are a bit more advantageous than regular future contracts that we learnt in level 2. Because the book when they do the example, they illustrate the concept of Eurodollar future contract against a FRA, but as we know one is standardized and the other is customizable, but the underlying is the same
Unfortunately, I haven’t the 2022 curriculum yet, and the example in the 2020/2021 curriculum is a bit different; there’s no mention of an FRA.
indeed, there is no mention of FRA either here.
I used the FRA analogy to show how I was trying to solve profit and loss for the eurodollar contract
Anyway thanks.
Hopefully, someone will see this and help me because it is driving me nuts