eurodollar hedge contract, decrease, increase, interest, against

soverby

If I wanted to hedge exposure against declining rates on a floating rate bond based on LIBOR? Would I go Long or short and why? I chose short, but the answer is long. A eurodollar futures contract will increase in value for a decrease in interest rates? Can someone please expain?

luda002

I'm confused if you go long a a floating LIBOR why would you lose when rates decline? Aren't you paying the lower rate or in this case are you receiving the lower rate?

KungFuPanda

If I am long a floating rate LIBOR position then what is my gain or loss exposure? I lose when rates decline and win when rates increase. I need to hedge against my losses so I need some type of protection for when rates decline.

Think about the inverse relationship between rates and fixed income securities. If rates decline then that make Eurodollar futures contract increase in value. Therefore I need to go long Eurodollar Futures to hedge my long floating LIBOR position. If I shorted the Eurodollar Futures contract I would have double loss exposure to declining LIBOR rates.

ayodayo

I just hit this question on scweser mock 1.

I think it's wrong. Going short makes the most sense.