Question

If you buy both a 30-day Eurodollar CD paying 6.7 percent and a 90-day futures on a 90-day Eurodollar CD with a price implying a yield of 7.2 percent, what is your total annualized return? (Both yields are based on 360-day years.)

                a.             7.25 percent

                b.             7.07 percent

                c.             10.15 percent

                d.             7.75 percent

5. 6.95 percent

Answer 1

Solution

	Euro Dollar	Futures	Total
Interest rate (Annual)	6.70%	7.20%
No of Days	30 Days	90 Days	120
Weighted yield	6.70% * 30 / 360	7.20% * 90 / 360
	0.56%	1.80%	2.358%

Now weighted Avg Yield = 2.358% * 360 / 120 = 7.07%

Therefore Correct answer is (B) that is 7.07%