Exam 21: Forward and Futures Contracts

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 T-Eill Eurqdollar September 93.25 92.35 -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.

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

Financial futures have become an increasingly attractive investment alternative since the Chicago Board of Trade (CBOT)began trading them in 1977,and their hedging function partly accounts for the growth in trading.Which of the following statements concerning financial futures is true?

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: 90 -day LIBOR 4.70\% 180 -day LIBOR 4.85\% 270-day LIBOR 5.10\% 360-day LIBOR 5.40\% -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?

Which of the following is true when F_?,T < E(S_T)?

The Eurodollar futures contract is a popular hedging vehicle because it is based on the three-month LIBOR.

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. Casel Case2 Current Value - January 2004 Bond Rate 10.5\% 10.5\% June 2004 Treasury Bonds 78.875 78.875 Estimated Values - Apr 2004 Bond Rate 11.0\% 10.0\% June 2004 Trea5ury Bonds 75.93 81.84 -Refer to Exhibit 21.1.Explain how you would go about hedging the bond issue?

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 T-Eill Euradollar September 95.24 94.6 -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.

A riskless stock index arbitrage profit is possible if the following condition holds:

The process by which invest on margin accounts are credited or debited to reflect daily trading gains or losses is referred to as the ____ process.

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: 90 -day LIBOR 4.70\% 180 -day LIBOR 4.85\% 270-day LIBOR 5.10\% 360-day LIBOR 5.40\% -Refer to Exhibit 21.3.If the bank wanted to hedge its exposure to falling LIBOR on this loan commitment,describe the sequence of transactions in the futures markets it could undertake.

The major difference between valuing futures versus forward contracts stems from the fact that future contracts are

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)?

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

According to the cost of carry model the relationship between the spot (S₀)and futures price (F_₀,T)is

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 T-Eill Eurqdollar September 93.25 92.35 -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 T-Bill futures position.

Stock index futures are useful in providing a hedge against movements in an underlying financial asset.

The number of future contracts needed to hedge a unit of the spot assets is solely a function of the variance of the spot prices.

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: 90 -day LIBOR 4.70\% 180 -day LIBOR 4.85\% 270-day LIBOR 5.10\% 360-day LIBOR 5.40\% -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.