There is this example in the Eurodollar Futures and Options Handbook by Burgharadt that appears to be inconsistent with the Eurodollar futures spot and settlement dates (Example 5.1):

Suppose that on June 17, 2002, you commit to borrow $1,000,000 on [Monday,] March 17, 2003, for 91 days. Under the terms of your agreement, you will pay whatever the value of 3-month LIBOR proves to be on [Monday,] March 17.

Now suppose you want to convert your floating rate borrowing into the equivalent of fixed rate borrowing. To do this, you can sell the March ′03 Eurodollar futures contract so that any increase in the rate you pay on your loan will be offset by gains in the value of your short Eurodollar position.

What are the cash flow consequences if the 3-month forward borrowing rate changes by 1 basis point?

Your source of risk in this example is the forward value of 3-month LIBOR from [Monday,] March 17, 2003, to [Monday,] June 16, 2003

The reason I think it is inconsistent is that the March '03 contract expires Monday, March 17, 2003, and settles to the 3-month LIBOR fixing on that day for the accrual period of Wednesday, March 19, 2003 to Wednesday, June 18, 2003. However, the accrual period for the loan is from Monday, March 17, 2003 to Monday, June 16, 2003, which is two days earlier than the accrual period for the 3-month LIBOR rate associated with hedging contract.

This apparent inconsistency is carried further:

...the cash consequence of the rate change will be realized on [Monday,] June 16, 2003. The March ′03 Eurodollar futures price will change in response to exactly the same rate.

The author does not seem to address this apparent inconsistency, so I am wondering if I am misunderstanding something or if the author was taking some liberties with the dates?

You must log in to answer this question.

Browse other questions tagged .