) Suppose you see Citibank’s USD-denominated 5-year interest rate swap numbers quoted at 4.25% bid and 4.45% ask. Mary tells you that the relevant fixed-rate cash flow of the swap she just entered is 4.25%. Did Mary buy or sell the IRS she just entered? b) IF Mary (from a) is a speculator, is Mary betting on/forecasting a decline in interest rates or betting on/forecasting a rise in interest rates?
Q: The market where existing securities are sold is: a the primary market b the secondary…
A: Securities are the financial items that are used to raise funds/capital from the public and private…
Q: Suppose that at the present time, one can enter 5-year swaps that exchange SOFR for 4%. An…
A: Notional principal= 110,000,000*(8%-4%)= 110,000,000*4% = 4400000Present Value can be calculated…
Q: While visiting one of my friends at a local bank, I overheard a high ranking bank executive tell one…
A: A statement has been made about a plain vanilla interest rate swap contract. We have to examine its…
Q: (Motivation for Interest rate swap) National Bank has a $200b Adjustable Rate Mortgage (ARM) as a…
A: Interest rate on borrowed funds = 2.34%+Libor.Tenure = 3 years Funds are borrowed in USD.
Q: ppose you start with buying a stock in £ (equivalent to $100) when the e te is £1 = $1.5. One year…
A: When money is invested in other market then there may be return due to increase prices and also due…
Q: Your customer has the following balance and wants to make a long term investment. What will be your…
A: Holding assets for a considerable amount of time—typically five years or more—in order to take…
Q: Here is some price information on FinCorp stock. Suppose that FinCorp trades in a dealer market.Bid…
A: Bid price refers to the maximum price offered by a buyer for a security and ask price refers to the…
Q: Suppose that you have revenues denominated in Japanese Yen expected in 6 months. How would you…
A: Answer:- In order to hedge the currency risk of Japanese yen using money market instrument which…
Q: If the unbiased expectations theory of the term structure of interest rates holds, what is the…
A: The unbiased expectations theory of the term structure of interest rates suggests that the current…
Q: 1. Explain FOUR(4) reasons that make money market instruments a popular investment among investors…
A: A financial market is a platform wherein traders trade securities with the aim to make economic…
Q: What is a mismatch risk (for an IRS)? Select one: The risk that a country will impose exchange rate…
A: Mismatch Risk Mismatch risk which was associated with many factors while in the investment which are…
Q: Use the following information about an interest rate SWAP contract to answer the following question.…
A: To solve this problem, we need to calculate the present value (PV) of the fixed and floating rate…
Q: Suppose that a trader observes the rates provided in the following table. Based on these rates, IRP…
A: The interest rate parity equation expresses the relationship that exists between exchange rates and…
Q: can help investors to transform assets. Use appropriate examples and diagrams t
A: An interest rate swap is a forward contract in which one unborn interest payments is changed for…
Q: Joey's bar has been the only bar in town for many years. There is a new bar opening next month.…
A: The objective of the question is to identify the type of financial risk that Joey's bar is exposed…
Q: A. Determine the swap's annualized fixed rate, given the current interest rate term structure as…
A: A. Calculate the discounting factor (D1) at initiation by the formula. The n is the number of days…
Q: . The first transaction is a forecasted transaction to buy 500 tons of inventory in 60 days. The…
A: Calculation of Earnings on Call option For the First 30 days Premium paid = $ 10 per ton…
Q: An investor enters into a 2-year swap agreement to swap euros at $1.32 per euro. Soon after the swap…
A: Swap is a derivative contract between two parties who agree to exchange financial instruments or…
Q: (Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay…
A: Future value = $2000Period = 28 yearsDiscount rate = 12%
Q: a liability of USD 1 million due in December 2021. You have receivables of 10 million Japanese yen…
A: Liability of the company payable in December 2021 is $ 1 Million Receivable due to the Company in…
Q: Suppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%. An…
A: LIBOR can be extended as London Inter-bank Offered Rate. It is the rate at which banks lend money to…
Q: An insurance company makes long-term loans with variable interest rates. It funds the loans by…
A: The explanation is briefly described in step 2
Q: Consider two securities that pay risk-free cash flows over the next two years and that have the…
A: Arbitrage refers to the profit that an investor earns because of the difference in the value of the…
Q: No Arbitrage 1. Consider the following three securities: SNOW, RAIN and SUN. SNOW pays $100 if it…
A: The question demonstrates the concept of nor arbitrage. The cash flows of risk less security has…
Q: Required a. Record the required journal entries for Year 1, Year 2, Year 3, and Year 4 related to…
A: Dateparticulars Debit($)Credit ($)Year 1Interest Expense 3000Interest Payable 3000To record interest…
Q: Here is some price information on Fincorp stock. Suppose that Fincorp trades in a dealer market.…
A: The recent price of stock or security at which stock or security is purchased and sold in the stock…
Q: Scenario is that you are suppose to borrow an amount of $9,000,000 for 91 days at LIBOR beginning…
A:
Q: Alice is a Financial Risk Manager in a large offshore bank in Kuala Lumpur. She intends to buy…
A: Intends to buy additional stocks valued at RM50 million Funds will be received after 3 months
Q: Suppose you work as a broker in an investment company, and there is an expectation that the market…
A: CD are issued at discount to the face value of CD so price of CD is always some value below face…
Q: The reading below deals with some typical swaption strategies and the factors that originate them.…
A: Since you have posted a question with multiple sub parts, we will provide the solution only to the…
Q: Prepare a short essay (approximately 3-5 pages) on what you predict interest rate levels will be in…
A: Term structure refers to the relationship between interest rates and the length of time until a debt…
Q: Consider a CDS on Lehman Brothers default event. Given today's market conditions you know that the…
A: Present value of expected premium payments= 6.0250*s Present value of expected accrual payments =…
Q: plain in detail how a five year plain vanilla interest rate swap with a notional value of $1,000,000…
A: In this question we will be explaining the 5 Years Vanilla Interest Payment SWAP with a notional…
Q: What is a mismatch risk (for an IRS)? a. The major risk faced by a swap dealer-the risk that a…
A: Mismatch risk occurs when a swap dealer finds it hard to find counterparty for swap . It occurs when…
Q: 1) If a speculator expects interest rates to increase, should they go long or short on a futures…
A: Treasury bond are referred to as the government debt securities, which are issued through the US…
Q: Tony Begay at Saguaro Funds. Tony Begay, a currency trader for Chicago-based Saguaro Funds, uses the…
A: Since we only answer up to 3 sub-parts, we’ll answer the first 3. Please resubmit the question and…
Q: A trader needs to estimate the CVA on a swap. The exposure management group comes up with EPE of $6…
A: STEP 1 The asking price of financial derivatives is adjusted for credit risks through a process…
Q: You are the party paying pounds and receiving euro and wanted to get out of a swap that you entered…
A: Since we are the party paying pounds, we would require pounds in the future for payment i.e. we…
Q: In other words, what will you be willing to pay in euro against receiving USD LIBOR?
A: To calculate the bid price of a euro swap against flat USD LIBOR, we need to determine the fixed…
Q: XYZ National Bank is one of the largest banks in the country. The bank has a significant amount of…
A: An interest rate swap is a financial instrument that allows two parties to exchange periodic…
Q: a. How many contracts must you purchase to protect your portfolio from exchange rate risk? b.…
A: a):Total exposure in dollar terms = $430,000Total exposure in pound terms = $430,000*0.57 = 245,100…
Q: Q2) Suppose the current one-year euro swap rate y0[0, 1] is 1.74%, and the two-yearand three-year…
A: Meaning of Euro swap rate:A swap rate is the fixed rate that a receiver demands, in exchange for…
Q: Consider the toss of a (loaded) coin. In a "good" outcome, punter (bettor) will receive £1 in 12…
A: Introduction to the questionSuppose, the probability of Good outcome = P1 Probability of bad outcome…
Q: For a bank that funds its fixed-rate loans with floating rate deposits whose cost varies with a the…
A: LIBOR: LIBOR is a benchmark that has traditionally been calculated using data provided by a group…
Q: Is the analyst's firm likely to be buying or selling credit default swaps on a distressed firm? OA.…
A: A CDS is a Credit Default Swap. This a derivative instrument where the buyer of the CDS gets…
a) Suppose you see Citibank’s USD-denominated 5-year interest rate swap numbers quoted at 4.25% bid and 4.45% ask. Mary tells you that the relevant fixed-rate cash flow of the swap she just entered is 4.25%. Did Mary buy or sell the IRS she just entered?
b) IF Mary (from a) is a speculator, is Mary betting on/
![](/static/compass_v2/shared-icons/check-mark.png)
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
- a) You observe the following quotes for the USD/AUD in the spot market from two banks: Bank of Sydney Bank of New York Bid Ask Bid Ask 0.71711 0.71715 0.71708 0.71715 Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculate the potential profit if you are able to use AUD 25,000. If not, explain why arbitrage is not possible? (b) You observe the following quotes for the GBP /AUD in the spot market from two banks: Bank of Melbourne Bank of London Bid Ask Bid Ask 0.5458 0.5459 0.5514 0.5515 Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculate the potential profit if you are able to use GBP 50,000. If not, explain why arbitrage is not possible? c) You observe the following quotes for the EUR / USD in the spot market from two banks: Deutsche Bank Bank of America Bid Ask Bid Ask 1.18102 1.18102 1.18094 1.18100 Do these quotes imply the…Suppose you are working as a treasurer in Citibank and your bank has taken a PKR250 million loan. The interest on the loan is KIBOR+50bp paid semiannually. The duration of the loan is four years. As you will have to pay interest, you are worried that in the future interest rates are likely to increase and you want to hedge this position by entering into a Swap contract. You ask Bank Al-Habib whether they would be willing to enter into a swap agreement and they send you these semi-annual swap rates: Period Bank Pays Bank Receives 2 years 3.34 3.37 3 years 4.01 4.04 4 years 4.47 4.50 5 years 4.79 4.82 6 years 5.02 5.05 Consider the following questions: What is the company’s cost of funds?This is part a) question and it's answer in order to answer part b) question Question: You hold a consol that pays a coupon C in perpetuity. The current interest rate is i, and the average expectation in the market is that this will remain unchanged. What will be the price of the consol today? answer : According to the question we need to calculate the current price of the perpetual consol. Perpetual consoles are priced differently because their expected income is spread through an indefinite period. So, perpetual consoles are priced using the current yield. The current yield is calculated as:- coupon amountMarket price×100coupon amountMarket price×100 After calculating the current yield price is calculated by the above formula where, i = Current interest rate y = yield so, the price of this consol will be Price = i/y I please need the solutions for part b) question b) In the next period however, the interest rate changes unexpectedly to i . What is the new price of the bond? If…
- You observe the following quotes for the USD/AUD in the spot market from two banks:Bank of Sydney /Bank of New YorkBid Ask/ Bid Ask0.71711 0.71715 /0.71708 0.71715Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculatethe potential profit if you are able to use AUD 25,000. If not, explain why arbitrage is not possible?(b) You observe the following quotes for the GBP /AUD in the spot market from two banks:Bank of Melbourne/ Bank of LondonBid Ask/ Bid Ask0.5458 0.5459 /0.5514 0.5515Do these quotes imply the possibility of earning a profit by using locational arbitrage? If so, calculatethe potential profit if you are able to use GBP 50,000. If not, explain why arbitrage is not possible?c) You observe the following quotes for the EUR / USD in the spot market from two banks:Deutsche Bank/ Bank of AmericaBid Ask /Bid Ask1.18102 1.18102 /1.18094 1.18100Do these quotes imply the possibility of earning a profit by using locational arbitrage? If…1. A farmer enters a contract to sell her produce at a fixed price in the future and the future market price turns out to be five times as high as the agreed fixed price. The farmer regrets entering into the futures contract. This is an example of efficient risk sharing. question: true or false? 2. Sam-Bankman Fried is the founder of crypto currency exchange FTX. He raised US$420 million from an array of major investors in October 2021. When he pitched to clients, he usually was dressed in a t-shirt. Question: What you wear is not taken into account by professional investors. True or False? 3. “Cooped up at home by stay-at-home orders during the anxious early days of the pandemic, many people used their newfound free time and stimulus checks to pick up a new hobby. Some turned to fitness or learning to play an instrument, while others found a rather unhealthy and risky new side hustle: day trading. Inspired by stupendous returns posted on Reddit’s WallStreetBets and TikTok by random…Fred Bankman is a hedge fund manager. He has obtained the following exchange rate and interest rate quotations: Bid Ask Spot rate(dollars per euro) 1.0867 1.0871 One-year forward rate(dollars per euro) 1.1078 1.1083 Deposit Loan One -year euro interest rate 3.212% 3.356% One-year dollar interest rate 5.215% 5.316% Is there any arbitrage opportunity? if so, explain how Mr Bankman might make use of the opportunity and express his arbitrage profit in dollars. If not, explain why not.
- 1. Why are financial markets so keenly regulated? Explain the rational for the regulation 2. A. Nii Laryea purchased a T-bill with a GHC10,000 par value for GHC9,465. Onehundred days later, Nii sells the t-bill for GHC9,650. Assuming 365 days in a year,what is Nii Laryea’s expected annualized yield from the transaction? 3. Endicott Enterprises Inc. has twenty years remaining on Ghc 1,000 par valuesemiannual coupon bonds paying a coupon of Ghc40. If the yield to maturity on thesebonds is 6% per year, what is the current price? 4. Can a borrower in Ghana face penalties if a loan is prepaid? Discuss two reasons whya borrower would decide to bear this cost. 5.Give an account of the impact of the Coronavirus (COVID 19) on the financial marketswith illustrations from two (2) global financial centres known to you.Which of the following are characteristics of Treasury bills (T- bills)? Check all that apply. There is a secondary market for T - bills. Institutional investors can purchase T - bills. Individuals can purchase T- bills. T - bills have maturities of 28, 91, and 182 days. Suppose Mr. Smith buys a 30-day T - bill with a face value of $1,000 at a price of $ 996. The discount rate yield (DRY) would be, whereas the investment return yield (IRY) would be.Suppose a bank enters a repurchase agreerment in which it agrees to sell Treasury securities to a correspondent bank at a price of $9.99,838 with the promise to buy them back at a price of $10.000,073. Calculate the yield on the repo if it has a 6-day maturity. (write your answer in percentage and round it to 2 decimal places)
- You work in a derivatives section in an investment bank. In August, a customer who holds Texa stock priced at $150 is worried that the stock will fall in price by the end of the year. Assuming the stock does not pay a dividend, can you sell the customer an option that insures that if the stock price falls below $145, their stock plus option payoff will never fall below $145? Explain.Q3: Suppose you are working as a treasurer in Citibank and your bank has taken a PKR250 million loan. The interest on the loan is KIBOR+50bp paid semiannually. The duration of the loan is four years. As you will have to pay interest, you are worried that in the future interest rates are likely to increase and you want to hedge this position by entering into a Swap contract. You ask Bank Al-Habib whether they would be willing to enter into a swap agreement and they send you these semi-annual swap rates: Period Bank Pays Bank Receives 2 years 3.34 3.37 3 years 4.01 4.04 4 years 4.47 4.50 5 years 4.79 4.82 6 years 5.02 5.05 Consider the following questions: What will the swap structure look like, given the fact that a bank Al-Habib requires an additional 5bp credit risk return for this client? Draw a diagram. What is the company’s cost of funds?An investment bank sells securities under a repurchase agreement for $800.438 million and buys them back in 7 days for $800.568 million. What is the repo's single payment yield?Report your answer in % to the nearest 0.01%;