EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 22, Problem 5CP
A
Summary Introduction
To explain: The generation of positive cash flow by selling futures bonds in a rising rate of interest prior to the maturity of the futures contract.
Introduction: The future trading is performed between two parties like buyer and seller. The commodities are exchanged in future at predetermined price.
B
Summary Introduction
To explain: Compare the cost price of the future contract at higher price with the spot price of bonds prior to the maturity.
Introduction: Vanhusen suggested that carry price of the future bonds are higher than the spot prices of the prior bonds. Future contract is an agreement between buyer and seller for the future time to exchange commodities at specific price.
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Students have asked these similar questions
Elizabeth intends to use the Hang Seng Index (HSI) futures to hedge her portfolio. Which of the followings is her least concern with respect to using the HSI futures contract?
a) Expiry of the futures contract
b) Current level of Hang Seng Index
c) Systematic risk of her portfolio
d) Volatility of the stock market e) Risk‐free rate
Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?
a. Forward contracts can be tailored, while future contracts are non-standardized.
b. Forward contracts are classified as exotic derivatives.
c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house.
d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity.
e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.
Suppose that you purchase a Treasury bond futures contract at $95 per $100 of face value.
What is your obligation when you purchase this futures contract?
If an FI purchases this contract, in what kind of hedge is it engaged?
Assume that the Treasury bond futures price falls to 94. What is your loss or gain?
Assume that the Treasury bond futures price rises to 97. Mark your position to market.
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