Exam 15: Forward, Futures, and Swap Contracts

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

Which of the following is true when F_0,T < E(S_T)?

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 15.13. Calculate the overall profit.

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

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 percent, and the annualized dividend is 2 percent. You are currently considering purchasing a two-month futures contract for your portfolio. -Refer to Exhibit 15.12. If the futures contract was currently available for 1350, calculate the arbitrage profit.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The WallMal Company has entered into a four-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8 percent per year and receive six-month LIBOR. The notional principal is $50,000,000. -Refer to Exhibit 15.19. Assume that one year later the fixed rate on a new three-year receive fixed pay floating LIBOR swap has fallen to 7 percent per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on $100 face value.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 * 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5 percent in exchange for receiving three-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3 percent. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6. -Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the contract specified settlement in advance, describe the transaction that occurs between the dealer and TexMex.

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 percent, and the annualized dividend is 2 percent. -Refer to Exhibit 15.9. Calculate the price of the futures contract now.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows: -Refer to Exhibit 15.7. A bond portfolio manager expects a cash inflow of $10,000,000. The manager plans to hedge potential risk with a Treasury futures contract with a value of $102,150. The conversion factor between the CTD and the bond specified in the Treasury futures contract is 0.88. The duration of bond portfolio is six years, and the duration of the CTD bond is 4.5 years. Indicate the number of contracts required and whether the position to be taken is short or long.

Financial futures have become an increasingly attractive investment alternative because 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?

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.

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 15.11. How many contracts should you buy or sell in order to increase the portfolio beta to 1.30 (rounded to the nearest integer)?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider a portfolio manager with a $20,500,000 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 1250 and has a multiplier of 250. The portfolio beta is 1.25. -Refer to Exhibit 15.10. Calculate the number of contract required to hedge the risk exposure and indicate whether the manager should be short or long.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A three-month T-bond futures contract (maturity 20 years, coupon 6 percent, face $100,000) currently trades at $98,781.25 (implied yield 6.11 percent). A three-month T-note futures contract (maturity 10 years, coupon 6 percent, face $100,000) currently trades at $101,468.80 (implied yield 5.80%). Assume semiannual compounding. -Refer to Exhibit 15.4. Suppose the yield curve changed so the that the new yield on the T-bond contract rose to 6.5 percent, and the new yield on the T-note contract fell to 5.5 percent. Calculate the profit on the note against bond futures spread. (Assume coupons are paid semiannually)

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 15.3. What is the implied 90-day forward rate at the beginning of the fourth quarter?

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 bonds 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 15.1. Explain how you would go about hedging the bond issue?

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

In your portfolio you have $1 million of 20-year, 8 5/8 percent bonds that are selling at 83.15 (or 83 15/32) against this position. Because you feel interest rates will rise, you sell 10 bond futures at 81.15 (or 81 15/32) against this position. Two months later, you decide to close your position. The bonds have fallen to 78, and the futures contracts are at 75.16 (75 16/32). Disregarding margin and transaction costs, what is your gain or loss?

Financial futures include all of the following underlying securities EXCEPT

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10 percent. -Refer to Exhibit 15.8. Calculate the current value of one contract.