6. X plc has a 6 month £8.25m 6% loan due for rollover in 4 months' time. The Treasurer is concerned that interest rates will rise before that date. Current Futures price is 93 and the underlying bond is £500k. In 4 months' time the interest rate is 8.5% and the futures rate is 91.00. How could the Hedge have been performed? And what would its outcome be?

6. X plc has a 6 month £8.25m 6% loan due for rollover in 4 months' time. The Treasurer is concerned that interest rates will rise before that date. Current Futures price is 93 and the underlying bond is £500k. In 4 months' time the interest rate is 8.5% and the futures rate is 91.00. How could the Hedge have been performed? And what would its outcome be?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A bond sold one month ago for £107. The bond is worth £112 in today's market. Assuming no changes in risk, which of the following is true? A. The bond's current yield has increased from one month ago. B. The bond must have at least 5 years before maturity. C. Interest rates must be higher now than they were one month ago. D.The coupon payment of the bond must have increased. E. None of the above
c. The investments officer for Sillistine Savings is concerned about interest rate risk lowering the value of the institution's bonds. A check of the bond portfolio reveals an average duration of 4.5 years. How could this bond portfolio be altered in order to minimize interest rate risk within the next year?
Please answer a,b
Y7 I. It’s March, a bond with semiannual coupons that matures in one year is selling for $50, the next coupon of $5 is due in July. The risk-free interest rate is 6% p.a. continuously compounded for all maturities. The 6-month forward contract on this bond with physical delivery is selling for $48. Are there arbitrage opportunities to be exploited? If so, lay out the opportunity in full with detailed explanations and exact cash flows at each step.
Consider a CDS on Lehman Brothers default event. Given today’s market conditions you know that the present value of expected premium payments 6.0250*s, the present value of expected accrual payments is 0.0515*s and the present value of expected payoff is 0.1325. All measured per $1 of notional principal. You also know that Argo hedge fund bought this CDS on Lehman Brothers default from AIG one week ago with contractual rate of X basis points per year. Given this information the breakeven spread (i.e. the value of s) is _________ and today’s value of the CDS contract to AIG is positive if the value of s is _______ than X. a. 222 basis points;greater b. 218 basis points; smaller c. 218 basis points, greater d. 222 basis points; smaller e. 84 basis points; greater Please help and explain
(c) BingBing Co has borrowed a £25 million money market loan, where the interest rate is LIBOR +300 basis points. It is currently 15th May 20X0 and LIBOR is 2.5%. The interest rate is due to be reset for the following 3 months on the 1st July 20X0 (i.e. LIBOR will be reset). The company wishes to hedge its exposure using short term interest rate futures contracts (STIRS). Assume the actual futures price on the 15th May 20X0 is 97. Calculate and discuss the outcome of the hedge if basis is 0.2 and LIBOR is 3% on the 1st July 20X0. The discussion should include basis risk.
You manage a bond portfolio worth $400 million. You wish to hedge your portfolio against rise in interest rates by using T-bond futures that will mature in 9 months. The duration of your bond portfolio is 6 years, the duration of the T-bond is 7 years. The bond futures price is 98,000, (a) What action must you take and how many contracts? (b) Why do you need to use the duration of the bonds to get the answer
3. An investor enters into a forward contract to sell a bond in 3 months time at $100. After one month, the bond price is $99.06. Suppose the interest rate is 5% continuously compounded at all maturities. a) Assuming no coupons are due on the bond over the next two months, what is now the forward price of the bond? b) What is the marked-to-market value of the investor's short position?
Suppose an investor sells 100 stocks by short selling for 6 months, the stock price is 30 yuan, and the annual interest rate of 6 months is fixed at 3%. How can I use forward contracts to avoid risks? What is the execution price? Please analyze if the stock price rises to 35 yuan or falls to 25 yuan after 6 months of hedging, what are the losses of this investor?
Suppose the quoted futures price for delivery in 1 year is $7.10. The current underlying price is $7 and the continuously compounded interest rate is 5%. The underlying does not pay dividends. How could you make a riskless arbitrage profit? Question 2Answer a. buy futures contracts, short sell the stock and invest in a bank account b. borrow from the bank to buy futures contracts and short sell the stock c. sell futures contracts, borrow and buy the stock d. sell future contacts, short sell the stock and invest in a bank account
!
Suppose that ABC bank decides to purchase a T-note and convert it into a STRIP. The T-note has a maturity of 6 years, pays a 6% coupon rate (semiannual) and a face value of $10,000. How many separate securities can be created? O 6 O 12 O 13

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