Exam 21: Forward and Futures Contracts

Exhibit 21.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: -A bond portfolio manager expects a cash inflow of $12,000,000. The manager plans to hedge potential risk with a Treasury futures contract with a value of $105,215. The conversion factor between the CTD and the bond specified in the Treasury futures contract is 0.85. The duration of bond portfolio is 8 years, and the duration of the CTD bond is 6.5 years. Indicate the number of contracts required and whether the position to be taken is short or long.

Exhibit 21.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: -Refer to Exhibit 21.3. What is the implied 90-day forward rate at the beginning of the second quarter?

Exhibit 21.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: -Refer to Exhibit 21.3. If 90-day LIBOR rises to the levels "predicted" by the implied forward rates, what will the dollar level of the bank's interest receipt be at the end of the second quarter?

The most popular financial futures in terms of average daily volume is the

Exhibit 21.11 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider a portfolio manager with a $10,000,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1350 and has a multiplier of 250. The portfolio beta is 1.50. -Refer to Exhibit 21.11. Assume that a month later the equity portfolio has a market value of $10,000,000 and the stock index future is priced at 1300 with a multiplier of 250. Calculate the profit (loss) on the stock index futures position.

Exhibit 22.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for a common stock -Since futures contracts are "marked-to-market" daily, the gains and losses are settled daily.

Exhibit 21.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As a portfolio manager, you are responsible for a $150 million portfolio, 90 percent of which is invested in equities, with a portfolio beta of 1.25. You are utilizing the S&P 500 as your passive benchmark. Currently the S&P 500 is valued at 1202. The value of the S&P 500 futures contract is equal to $250 times the value of the index. The beta of the futures contract is 1.0. -Refer to Exhibit 21.9. If you anticipate a cash outflow of $5 million next week, how many futures contracts should you buy or sell in order to mitigate the effect of this outflow on the portfolio's performance (rounded to the nearest integer)?

Interest rate parity is a key concept in managing risk in the commodities market.

Exhibit 22.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider the following information on put and call options for a common stock -Some forward contracts, particularly in the foreign exchange market, are quite standard and liquid.

Exhibit 21.10 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The S&P 500 stock index is at 1300. The annualized interest rate is 4.0% and the annualized dividend is 2%. You are currently considering purchasing a 2-month futures contract for your portfolio. -Refer to Exhibit 21.10. Calculate the current price of the futures contract.

Exhibit 21.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: -Refer to Exhibit 21.3. If 90-day LIBOR rises to the levels "predicted" by the implied forward rates, what will the dollar level of the bank's interest receipt be at the end of the fourth quarter?

Exhibit 21.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: -Refer to Exhibit 21.3. Assuming the yields inferred from the Eurodollar futures contract prices for the next three settlement periods are equal to the implied forward rates, calculate the dollar value of the annuity that would leave the bank indifferent between making the floating-rate loan and hedging it in the futures market, and making a one-year fixed-rate loan.

Exhibit 21.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the annualized dividend is 2%. -Refer to Exhibit 21.5. If the futures contract was currently available for 1250, indicate the appropriate strategy that would earn an arbitrage profit.

The Chicago Board of Trade (CBT) uses conversion factors to correct for differences in deliverable bonds.

If you have entered into a currency futures hedge for the Japanese yen in connection with buying Japanese equipment, if the yen goes from 110 yen/$1 to 100 yen/$1, you will lose in the spot market but have an offsetting gain in the futures market.

The basis (B_t,T) at time t between the spot price (S_t) and a futures contract expiring at time T (F_t,T) is: S_t -F_t,T.

Exhibit 21.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Assume that you observe the following prices in the T-Bill and Eurodollar futures markets -Refer to Exhibit 21.7. Assume that a month later the price of the September T-Bill future is 96.25 and the price of the Eurodollar future is 95.9. Calculate the profit on the T-Bill futures position.

Exhibit 21.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: -Assume that you manage an equity portfolio. The portfolio beta is 1.15. You anticipate a rise in equity values and wish to increase equity exposure on $500 million of the portfolio. Calculate the number of contracts you would need to hedge your position and indicate whether you would go short or long. Assume that the price of the S&P 500 futures contract is 1105 and the multiplier is 250.

The bond that maximizes the difference between the invoice price and the delivery price is referred to as the

Exhibit 21.10 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The S&P 500 stock index is at 1300. The annualized interest rate is 4.0% and the annualized dividend is 2%. You are currently considering purchasing a 2-month futures contract for your portfolio. -Refer to Exhibit 21.10. If the futures contract was currently available for 1280, indicate the appropriate strategy that would earn an arbitrage profit.