Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 121 – 100. Dudley Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is $100,000. a. Should the bank go long or short on the futures contracts? b. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 121 – 210. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) c. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 120 - 270. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) a. The futures contracts b. Net profit c. Net profit

Dudley Savings Bank wishes to take a position in Treasury bond futures contracts, which currently have a quote of 121 – 100. Dudley Savings thinks interest rates will go down over the period of investment. The face value of the bond underlying the futures contract is $100,000. a. Should the bank go long or short on the futures contracts? b. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts increases to 121 – 210. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) c. Given your answer to part (a), calculate the net profit to Dudley Savings Bank if the price of the futures contracts decreases to 120 - 270. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) a. The futures contracts b. Net profit c. Net profit

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
Suppose it is Jan 1st, and the futures price for August 1st delivery of a 1-year zero-coupon government T-bill is $96/$100FV. The size of one contract is for $1M face value If your bank goes long 20 contracts, is this a bet that interest rates are going to increase, or decrease? (type ‘increase’ or ‘decrease’) If your bank goes long 20 contracts, and the price of the August 1st future increases to $97, how much money is the bank up in this contract? The current $-Duration of a bank’s assets minus liabilities is 200M. If interest rates rise and the interest rate factor on all securities increases by 3%, how does the banks book value of equity change (in millions)? (note: a change which is a decrease would be a negative change)
A business plans to borrow approximately $40 million in short-term funding through the issue of commercial paper in three months’ time. The business does not have a view on what is likely to happen to interest rates over the next three months, but it would be very satisfied if it could obtain its funding at the current yield. Using the following data, show how 90-day bank-accepted bills futures contracts can be used to hedge the interest rate risk to which the business is exposed. Show the calculation and timing of all transactions and cash flows (ignore transaction costs and marginrequirements). Today’s data: current commercial paper yields 6.00 per cent perannum 90-day bank-accepted bills futures contract 93.75. Data in threemonths: commercial paper yields 7.00 per cent perannum 90-day bank-accepted bills futures contract93.25.
Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calculations. 1 British pound (spot) $1.7748 1 British pound (30-day futures) $1.7776
ABC Corporation wishes to raise money by selling a 90-day promissory note in the short-term money markets. The note promises to pay the holder $17,000,000 at maturity. If yields on similar risk notes are currently 2.8% p.a., how much money will ABC Corporation receive for the note? If the purchaser of the note holds it until maturity, what is the total amount of interest they will earn? For the purchaser in 2), what will be the return on investment (ignoring taxes)? Need help answering all these please!
Suppose you borrow $10,000,000 in the interbank money market at a KLIBOR yield of 6% pa for a term of 1 month.Should you buy or sell a KLIBOR futures contract if you were to hedge against interest rate risks? explain
Maria VanHusen, CFA, suggests that using forward contracts on fixed-income securities can be used to protect the value of the Star Hospital Pension Plan’s bond portfolio against the possibility of rising interest rates. VanHusen prepares the following example to illustrate how such protec-tion would work:∙ A 10-year bond with a face value of $1,000 is issued today at par value. The bond pays an annual coupon.∙ An investor intends to buy this bond today and sell it in 6 months.∙ The 6-month risk-free interest rate today is 5% (annualized).∙ A 6-month forward contract on this bond is available, with a forward price of $1,024.70.∙ In 6 months, the price of the bond, including accrued interest, is forecast to fall to $978.40 as a result of a rise in interest rates.a. Should the investor buy or sell the forward contract to protect the value of the bond against rising interest rates during the holding period?b. Calculate the value of the forward contract for the investor at the maturity of…
An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%.a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase?b. What must be the face value and market value of that zero-coupon bond?
A corporation plans to issue $10 million of 10-year bonds in three months. At current yields the bonds would have modified duration of 8 years. The T-note futures contract is selling at F0 =100 and has modified duration of 6 years. How can the firm use this futures contract to hedge the risk surrounding the yield at which it will be able to sell its bonds? Both the bond and the contract are at par value.
Now suppose a financial institution has a duration gap of -4 years and $5 million in assets. The cheapest to deliver bond for Treasury futures contracts has a duration of 3 years. How will the manager hedge this interest rate risk? Assume the cheapest to deliver bond is trading at par.
Citibank has developed a way of creating a zero-coupon bond, called a strip, from the coupon-bearing Treasury bond by selling each of the cash flows underlying the coupon-bearing bond as a separate security. You as a treasurer working for Citibank, have a relatively simple trading strategy. You would buy strips and sell them in the forward market. Suppose for example, that the 3-month interest rate is 4% per annum and the spot price of a strip is $70. Q1)What will be the 3-month forward price? Q2)Assuming that the actual forward price is 72, formulate an arbitrage strategy.
Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days’ settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day?