Exam 10: Futures Arbitrage Strategies

Determine the annualized implied repo rate on a Treasury bond spread in which the March is bought at 98.7 and the June is sold at 99.5. The March CF is 1.225 and the June CF is 1.24. The accrued interest as of March 1 is 0.75 and the accrued interest as of June 1 is 1.22.

What reason might be given for not wanting to hedge the future issuance of a liability if interest rates are unusually high?

The implied interest rate based on Treasury bond carry arbitrage will decrease when the cheapest-to-deliver bond price increases, everything else held constant.

Suppose you observe the spot euro at $1.50/€, the U. S. risk-free interest rate of 3.25% (continuously compounded), and the six month futures price of $1.50/€. Identify the correct implied European risk-free interst rate (select the closest answer).

Which of the following is a form of program trading?

The invoice price of a Treasury bond futures contract is based on the settlement price on position day and the conversion factor.

The unusual volatility that sometimes occurs at stock index futures expirations is because of the greater uncertainty.

Much of the volume of stock transactions in program trading occurs through the New York Stock Exchange's DOT system.

Transaction costs in program trading are so small that they are not much of a factor.

The implied repo rate is the return on an overnight repurchase agreement.

An increase in dividends will lower the theoretical value of the stock index futures contract.

Suppose you observe the spot euro at $1.38/€, the U. S. risk-free interest rate of 0.25% (continuously compounded), and the European risk-free interest rate of 0.75% (continuously compounded). Identify the theoretical value of a six month foreign exchange futures contract (select the closest answer).

The quality option is sometimes referred to as the switching option.

A deliverable Treasury bond has accrued interest of 3.42 per $100, a coupon of 9.5 percent, a price of 135 and a conversion factor of 1.195. The futures price is 112.25. What is the invoice amount?

If the futures price at 3:00 p.m. is 122, the spot price is 142.5 and the CF is 1.1575, by how much must the spot price fall by 5:00 p.m. to justify delivery?

The transaction designed to exploit mispricing in the relationship between futures and spot prices is called

The cheapest bond to deliver is the one that has the lowest spot price.

On the basis of liquidity, the best futures contract for hedging short-term interest rates is

Determine the amount by which a stock index futures is mispriced if the stock index is at 200, the futures is at 202.5, the risk-free rate is 6.45 percent, the dividend yield is 2.75 percent, and the contract expires in three months.

Use the following information to answer questions . On October 1, the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent. The November Fed funds futures is quoted at 94.50. The contract size is $5,000,000. -The dollar value of a one basis point rise in the Fed funds futures price is