Financial Markets and Institutions (2-downloads)

621

5. Suppose that the pension you are managing is expect-

ing an inflow of funds of $100 million next year and

you want to make sure that you will earn the current

interest rate of 8% when you invest the incoming

funds in long-term bonds. How would you use the

futures market to do this?

6. How would you use the options market to accomplish

the same thing as in Problem 5? What are the advan-

tages and disadvantages of using an options contract

rather than a futures contract?

7. If you buy a put option on a $100,000 Treasury bond

futures contract with an exercise price of 95 and the

price of the Treasury bond is 120 at expiration, is

the contract in the money, out of the money, or at

the money? What is your profit or loss on the con-

tract if the premium was $4,000?

8. Suppose that you buy a call option on a $100,000

Treasury bond futures contract with an exercise price

of 110 for a premium of $1,500. If on expiration the

futures contract has a price of 111, what is your profit

or loss on the contract?