A Large Money Center Bank Plans to Offer Money Market

Essay

A large money center bank plans to offer money market CDs in substantial volume (at least $100 million) in six months due to a projected upsurge in credit deals from some of its most valued corporate customers. Unfortunately, the bank's economist has just predicted that money market interest rates should rise over the next year (with perhaps a full 1.5 percentage point increase within the next six months). Explain why the bank's management would be concerned about this development. Suppose management expects its corporate loan customers to resist any loan terms that would automatically result in loan rates being immediately adjusted upward to reflect any rate increases in the money market. What futures market transaction would you recommend? What is the best options contract alternative for the bank?