Exam 21: Forward and Futures Contracts

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. Calculate the overall profit.

In the absence of arbitrage opportunities, the forward contract price should be equal to the current price plus

Like hedging, arbitrage results in increased returns with a disproportional increase in risk.

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. Calculate the number of contract required to hedge the risk exposure and indicate whether the manager should be short or long.

Financial futures include all of the following underlying securities except

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, calculate the arbitrage profit.

An investor in a hedge position is no longer exposed to the absolute price movement of the underlying asset, but the investor is still exposed to basis risk.

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 -Forward contracts are individually designed agreements, and can be tailored to the specific needs of the ultimate end-user.

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. If you expected the TED spread to narrow over the next month then an appropriate strategy would be to

Exhibit 21.6 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 21.6. Assume that a month later the price of the September T-Bill future is 93 and the price of the Eurodollar future is 90.25. Calculate the profit on the Eurodollar futures position.

A backwardated futures market occurs when

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

The pure expectations hypothesis suggests futures prices serve as unbiased forecasts of future spot prices.

In the absence of arbitrage opportunities, the forward contract price should be equal to the current spot price plus interest.

Exhibit 21.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) In late January 2004, The Union Cosmos Company is considering the sale of $100 million in 10-year debentures that will probably be rated AAA like the firm's other bond issues. The firm is anxious to proceed at today's rate of 10.5 percent. As treasurer, you know that it will take until sometime in April to get the issue registered and sold. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts each representing $100,000. -Refer to Exhibit 21.1. Explain how you would go about hedging the bond issue?

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. -In late January 2011, Starlight Corporation is considering the sale of $50 million in 10-year debentures rated AAA. The issue will most likely be registered and sold some time in April. Therefore, Starlight Corporation desires to hedge the pending issue using Treasury bond futures contracts each representing $100,000. Explain how you would go about hedging the bond issue?

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 third quarter?

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 -Like future contracts, all forward contracts are processed by a clearing corporation.

Exhibit 21.4 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A 3-month T-bond futures contract (maturity 20 years, coupon 6%, face $100,000) currently trades at $98,781.25 (implied yield 6.11%). A 3-month T-note futures contract (maturity 10 years, coupon 6%, face $100,000) currently trades at $101,468.80 (implied yield 5.80%). Assume semiannual compounding. -Refer to Exhibit 21.4. If you expected the yield curve to flatten, the appropriate NOB futures spread strategy would be