INVESTMENTS
11th Edition
ISBN: 9781260689488
Author: Bodie
Publisher: MCG
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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
The 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…
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.
The reading below deals with some typical swaption strategies and the factors that originate them. First, read it carefully. Lehman Brothers and Credit Suisse First Boston are recommending clients to buy long-dated swaption vol ahead of the upcoming US Federal Open Markets Committee meeting. In the trade, the banks are recommending clients to buy long-dated swaption straddles, whose value increases if long-dated swaption vol rises. Mortgage servicers and investors are keen to hedge refinancing risk with swaptions as interest rates fall, meaning that long-dated swaption vol should rise over the next several months, said an official at CSFB in New York. The traditional supply of swaption vol has been steadily decreasing over the last year, said (a trader) in New York. Agencies supply vol to dealers mainly via entering swaps with embedded options on the back of issuing callable notes. Over the past year, demand for callable notes has been decreasing due to high interest rate volatility,…
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Similar questions
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