INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
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.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents 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.
Chapter 22 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Knowledge Booster
Similar questions
- Bright is the current manager of a large, well-diversified school endowment fund in the Philippines. He is actively considering the implementation of sophisticated derivative strategies to protect the fund’s market value in the event of a substantial decline in the overall level of equity prices. Meanwhile, Bright’s colleague, Baifern suggested that he acquire either: a short position in an S&P 500 Index Futures contract OR a long position in an S&P Index Put Option contract. Question: Explain how each of these derivative strategies would affect the risk and return of the resulting augmented endowment portfolio.arrow_forwardThe number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors): the relative duration of bank assets and the duration of the underlying security named in the futures the price of the futures All of the options are correct A financial institution that uses a long hedge is most likely: trying to avoid higher borrowing trying to avoid declining asset trying to avoid lower than expected yields from loans and trying to avoid higher borrowing costs or trying to avoid declining asset An advantage of interest rate swap is that: it can help protect from interest rate it can help closely match the maturities of assets and it can help transform actual cash flows to more closely match desired cash flow All of the options are correct Default risk on bonds can be evaluated by using: financial analysis bond ratings estimates of potential losses on bonds a and b…arrow_forwardA hedger buys a futures contract, taking a long position in the wheat futures market. What are the hedger's obligations under this contract? Describe the risk that is hedged in this transaction, and give an example of someone who might enter into such an arrangement.arrow_forward
- You are a risk analyst in a public pension fund. You have been asked to calculate the appropriate amount of futures to hedge the bond below. What is your calculation?arrow_forwardSuppose a oil producer wants to hedge against possible price fluctuations in the market. For example, in November, he decides to enter into a short-sell position in a 2 (two) futures contracts in order to limit his exposure to a possible decline in the cash price prior to the time when he will sell his oil in the cash market. Assume that the spot price of oil is $30 and the futures price for a March futures contract is $45. What is the basis? Выберите один ответ: a. 30 b. 7.5 c. 25 d. 15 e. 45arrow_forwardFrank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investiment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Specifically, Spice would like to know how fixed-income managers position portfolios to capitalize on their expectations of future interest rates. Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have samiannual coupon periods. Unless otherwise stated, all interest rate (yield curve) changes are parallel. The characteristic of these securities are shown in the following table. He also considers a nine-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Fixed-rate bond: price 107.18, YTM 5%, TMT (years) 18, modified duration (years) 6.9848. Fixed-rate note: price 100, YTM 5%, TMT (years) 8, modified duration…arrow_forward
- Several investment committee members have asked about interest rate swap agreements and how they are used in the management of domestic fixed-income portfolios. (i) Define an interest rate swap and briefly describe the obligation of each party involved (ii) Cite and explain two examples of how interest rate swaps could be used by a fixed-income portfolio manager to control risk or improve return.arrow_forwardDue to a lack of information, a trader is not able to retrieve the yield of government bonds as the risk-free rate to use in the pricing of a call option. Instead, the yield of the highest-rated investment-grade corporate bond is considered a close substitute. Explain how this substitution of the risk-free rate would impact the call option price.arrow_forwardFrank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Characteristics of Fixed-Rate Bond and Fixed-Rate Note Fixed-Rate Bond Fixed-Rate Note Price 107.18 100.00 Yield to maturity 5.00% 5.00% Time to maturity (years) 18 8 Modified duration (years) 6.9848 3.5851 Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers…arrow_forward
- Jaleel knows that the primary purpose of a futures contract is the management ofrisk exposures. Use Qantas Airlines as an example to further explain how a futurescontract achieves this risk management function.arrow_forwardHi!, i have received a problem from my instructor that really confuses me and Im not really sure where to start with it. The problem-Imagine a particular security’s default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.50 percent. The security’s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security’s equilibrium rate of return. Show your work.arrow_forwardConsider a firm in the DC that uses inputs from a supplier in the FC. To hedge the FX risk the FC firm could (select all that are true): A.Purchase a futures contract for DC to FC below your expected future trajectory of the FX rate and that the supply cotract is written in the DC B.Purchase a call option for FC to DC, which the firm will exercise if the spot FX rate (FC/DC) at the time is higher than the contract rate and the supply contract is written in the DC. C.Purchase a futures contract for FC to DC that you could sell for a profit if the DC weakens, which increases your costs of exporting the input D.Engage in a forward contract for DC to FC at today's spot rate, given that counter-party risk is managable and that the supply contract can be written in the DC. E.Exercise a futures contract for DC to FC if the strike price of the contract (FC/DC) is higher than the spot market rate at that time and that the supply contrtact can be written in the DC. F.Purchase a call option…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you