Financial Markets and Institutions (2-downloads)

9. Explain why greater volatility or a longer term to

maturity leads to a higher premium on both call and

put options.

10. If the savings and loan you manage has a gap of

–$42 million, describe an interest-rate swap that

would eliminate the S&L’s income risk from changes

in interest rates.

11. If your company has a payment of 200 million euros

due one year from now, how would you hedge the for-

eign exchange risk in this payment with 125,000 euros

futures contracts?

12. If your company has to make a 10 million euros pay-

ment to a German company in June, three months

from now, how would you hedge the foreign

exchange risk in this payment with a 125,000 euros

futures contract?

13. Suppose that your company will be receiving 30 million

euros six months from now and the euro is currently

selling for 1 euro per dollar. If you want to hedge the

foreign exchange risk in this payment, what kind of for-

ward contract would you want to enter into?

14. A hedger takes a short position in five T-bill futures

contracts at the price of 98 5/32. Each contract is

for $100,000 principal. When the position is closed,

the price is 95 12/32. What is the gain or loss on this

transaction?

15. A bank issues a $100,000 variable-rate 30-year mort-

gage with a nominal annual rate of 4.5%. If the

required rate drops to 4.0% after the first six months,

what is the impact on the interest income for the first

12 months? Assume the bank hedged this risk with

a short position in a 181-day T-bill future. The origi-

nal price was 97 26/32, and the final price was 98 1/32

on a $100,000 face value contract. Did this work?

16. Laura, a bond portfolio manager, administers a

$10 million portfolio. The portfolio currently has a

duration of 8.5 years. Laura wants to shorten the

duration to 6 years using T-bill futures. T-bill futures

have a duration of 0.25 years and are trading at $975

(face value = $1,000). How is this accomplished?

17. Futures are available on three-month T-bills with a

contract size of $1 million. If you take a long position

at 96.22 and later sell the contracts at 96.87, how

much would the total net gain or loss be on this

transaction?

18. Chicago Bank and Trust has $100 million in assets and

$83 million in liabilities. The duration of the assets

is 5.9 years, and the duration of the liabilities is

1.8 years. How many futures contracts does this bank

need to fully hedge itself against interest-rate risk?

The available Treasury bond futures contracts have

a duration of 10 years, a face value of $1,000,000, and

are selling for $979,000.

19. A bank issues a $3 million commercial mortgage with

a nominal APR of 8%. The loan is fully amortized over

10 years, requiring monthly payments. The bank

plans on selling the loan after two months. If the

required nominal APR increases by 45 basis points

when the loan is sold, what loss does the bank incur?

20. Assume the bank in the previous question partially

hedges the mortgage by selling three 10-year T-note

futures contracts at a price of 100 20/32. Each con-

tract is for $1,000,000. After two months, the futures

contract has fallen in price to 98 24/32. What was the

gain or loss on the futures transaction?

21. Springer County Bank has assets totaling $180 million

with a duration of five years, and liabilities totaling

$160 million with a duration of two years. Bank man-

agement expects interest rates to fall from 9% to

8.25% shortly. A T-bond futures contract is available

for hedging. Its duration is 6.5 years, and it is cur-

rently priced at 99 5/32. How many contracts does

Springer need to hedge against the expected rate

change? Assume each contract has a face value of

$1,000,000.

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