|
Selected Economic and Financial Data
U.S. 1-year Treasury bond yield
2.5%
Mexican 1-year bond yield
6.5%
Nominal Exchange Rates
Spot
9.5000 Pesos 5 U.S. $1.00
1-year forward
9.8707 Pesos 5 U.S. $1.00
Hamson recommends buying the Mexican 1-year bond and hedging the foreign currency expo-
sure using the 1-year forward exchange rate. Calculate the U.S. dollar holding-period return that
would result from the transaction recommended by Hamson. Is the U.S. dollar holding-period
return resulting from the transaction more or less than that available in the U.S.?
5. a. Pamela Itsuji, a currency trader for a Japanese bank, is evaluating the price of a 6-month
Japanese yen/U.S. dollar currency futures contract. She gathers the following currency and
interest rate data:
Japanese yen/U.S. dollar spot currency exchange rate
¥124.30/$1.00
6-month Japanese interest rate
0.10%
6-month U.S. interest rate
3.80%
Calculate the theoretical price for a 6-month Japanese yen/U.S. dollar currency futures contract,
using the data above.
b. Itsuji is also reviewing the price of a 3-month Japanese yen/U.S. dollar currency futures con-
tract, using the currency and interest rate data shown below. Because the 3-month Japanese
interest rate has just increased to .50%, Itsuji recognizes that an arbitrage opportunity exists
and decides to borrow $1 million U.S. dollars to purchase Japanese yen. Calculate the yen
arbitrage profit from Itsuji’s strategy, using the following data:
Japanese yen/U.S. dollar spot currency exchange rate
¥124.30/$1.00
New 3-month Japanese interest rate
0.50%
3-month U.S. interest rate
3.50%
3-month currency futures contract value
¥123.2605/$1.00
6. Janice Delsing, a U.S.-based portfolio manager, manages an $800 million portfolio ($600 million
in stocks and $200 million in bonds). In reaction to anticipated short-term market events,
Delsing wishes to adjust the allocation to 50% stock and 50% bonds through the use of futures.
Her position will be held only until “the time is right to restore the original asset allocation.”
Delsing determines a financial futures–based asset allocation strategy is appropriate. The stock
futures index multiplier is $250 and the denomination of the bond futures contract is $100,000.
Other information relevant to a futures-based strategy is as follows:
Bond portfolio modified duration
5 years
Bond portfolio yield to maturity
7%
Price value of a basis point of bond futures
$97.85
Stock-index futures price
1378
Stock portfolio beta
1.0
bod61671_ch23_799-834.indd 831
bod61671_ch23_799-834.indd 831
7/25/13 2:01 AM
7/25/13 2:01 AM
Final PDF to printer
Visit us at www
.mhhe.com/bkm
832
P A R T V I
Options, Futures, and Other Derivatives
a. Describe the financial futures–based strategy needed and explain how the strategy allows
Delsing to implement her allocation adjustment. No calculations are necessary.
b. Compute the number of each of the following needed to implement Delsing’s asset allocation
strategy:
i. Bond futures contracts.
ii. Stock-index futures contracts.
7. You are provided the information outlined as follows to be used in solving this problem.
Issue
Price
Yield to
Maturity
Modified
Duration*
U.S. Treasury bond 11¾% maturing Nov. 15, 2029
100
11.75%
7.6 years
U.S. Treasury long bond futures contract
(contract expiration in 6 months)
63.33
11.85%
8.0 years
XYZ Corporation bond 12½% maturing June 1, 2020
(sinking fund debenture, rated AAA)
93
13.50%
7.2 years
Volatility of AAA corporate bond yields relative to
U.S. Treasury bond yields 5 1.25 to 1.0 (1.25 times)
Assume no commission and no margin requirements on U.S. Treasury long bond futures
contracts. Assume no taxes.
One U.S. Treasury bond futures contract is a claim on $100,000 par value long-term U.S.
Treasury bonds.
*Modified duration 5 Duration/(1 1 y).
Situation A
A fixed-income manager holding a $20 million market value position of U.S.
Treasury 11¾% bonds maturing November 15, 2029, expects the economic growth rate and the
inflation rate to be above market expectations in the near future. Institutional rigidities prevent
any existing bonds in the portfolio from being sold in the cash market.
Situation B The treasurer of XYZ Corporation has recently become convinced that interest rates
will decline in the near future. He believes it is an opportune time to purchase his company’s
sinking fund bonds in advance of requirements because these bonds are trading at a discount from
par value. He is preparing to purchase in the open market $20 million par value XYZ Corporation
12½% bonds maturing June 1, 2020. A $20 million par value position of these bonds is currently
offered in the open market at 93. Unfortunately, the treasurer must obtain approval from the board
of directors for such a purchase, and this approval process can take up to 2 months. The board of
directors’ approval in this instance is only a formality.
For each of these two situations, demonstrate how interest rate risk can be hedged using the
Treasury bond futures contract. Show all calculations, including the number of futures contracts
used.
8. You ran a regression of the yield of KC Company’s 10-year bond on the 10-year U.S. Treasury
benchmark’s yield using month-end data for the past year. You found the following result:
Yield
KC
5 0.54 1 1.22 Yield
Treasury
where Yield
KC
is the yield on the KC bond and Yield
Treasury
is the yield on the U.S. Treasury
bond. The modified duration on the 10-year U.S. Treasury is 7.0 years, and modified duration on
the KC bond is 6.93 years.
a. Calculate the percentage change in the price of the 10-year U.S. Treasury, assuming a 50-basis-
point change in the yield on the 10-year U.S. Treasury.
b. Calculate the percentage change in the price of the KC bond, using the regression equation
above, assuming a 50-basis-point change in the yield on the 10-year U.S. Treasury.
bod61671_ch23_799-834.indd 832
bod61671_ch23_799-834.indd 832
7/25/13 2:01 AM
7/25/13 2:01 AM
Final PDF to printer
Visit us at www
.mhhe.com/bkm
C H A P T E R
2 3
Futures, Swaps, and Risk Management
833
E-INVESTMENTS EXERCISES
Go to the Chicago Mercantile Exchange Web site ( www.cme.com ) and link to the tab for
CME Products, then Foreign Exchange (FX). Link to the Canadian Dollar contracts and
answer the following questions about the futures contract (see Contract Specifications ):
What is the size (units of $CD) of each contract?
What is the tick size (minimum price increment) for the contract?
What time period during the day is the contract traded?
If the delivery option is exercised, when and where does delivery take place?
Do'stlaringiz bilan baham: | 
