Suffolk FINANCE 814 – Suppose you want to buy a house for $500
Suppose you want to buy a house for $500 thousand and sell it in 5 years. Suppose the bank offers you an adjustable rate mortgage with interest only payments for the first 5 years. The rate will adjust with 6-month LIBOR and interest payments will be due every 6 months. Devise a hedging strategy using Eurodollar futures that will allow you to hedge against interest rate increase (how many contracts will you trade, how often?).
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