when you hold a long position in floating rate bond, to hedge against this position, the answer from Schweser was to go long in a Eurodollar futures contract. how come this happen? the interest rate decrease leads to gain in a long position in a Eurodollar future !? just can’t understand BTW, the Eurodollar derivative is a pain
As with other fixed rate instruments, if the yield rises, the price of the futures contract falls, and vice-versa For example: If you are a buyer of a single 95.00 quoted contract(anticipated future interest rate is 5%), if at expiration - the interest rate has risen to 6.00% contract will be quoted at 94.00; the buyer compensates the seller 25¢ on each $100 in the $1,000,000 valued contract. You pay $2,500. at expiration - the interest rate has fallen to 4.00% contract will be quoted at 96.00; the seller compensates the buyer 25¢ on each $100 in the $1,000,000 valued contract. You receive $2,500. mistake or you misread…actually maybe you didnt…i dont quite get it either…but for hedging, its short-short…long-long btw that fucking asian girl on the cover makes me want to kill her…id rather have the guy…shes butt ugly and probably plays hard to get… ror… solly fol the lant
thank you mate so as I understand, fixed rate instrument refers to the bond itself, rather than the rate, which relates to FRA derivatives fixed rate instrument means you buy or sell the bond; will rate derivatives means you borrow or lend money at certain rate. am I correct?
no the fixed rate instrument referes to the eurodoll future, but i says it moves like any other fixed rate instrument If rate goes up, Euro doll future goes down http://en.wikipedia.org/wiki/Eurodollar dont fret man…just think of the way i said before : if you are long bond, go lonf euro doll to hedge… if you are short bond (ex you issued it), go short euro doll fut. ALSO: Suppose you issued a bond (short a bond)…and you pay Libor. You liability is LIBOR. If libor increases, you need to pay more. So you need a hedge whereby, if Libor increases, you recieve. If you are long EURODOLL FUT, and rates increase, you lose…so thats no good since you lose on your bond when the rates increase as well (by having to pay more for the floating rate coupon). So you short the EURO DOLL FUT, and if rates go up, you will make cash. SHORT-SHORT LONG-LONG
totally understand now i mixed up FRA and fixed rate instrument a bit 
Thank you
This is similar to T-Bill futures correct? If the rates go down and you are long, the discount to face is lower and you gain. Contrast with an FRA, if LIBOR rates go up and you are long, you are in a gaining position