A trader owns 55,000 units of a particular asset and decides to hedge the value of...
A trader owns 55,000 units of a particular asset and decides to hedge the value of her position with futures contracts on another related asset. Each futures contract is on 5,000 units. The spot price of the asset that is owned is $28 and the standard deviation of the change in this price over the life of the hedge is estimated to be $0.43. The futures price of the related asset is $27 and the standard deviation of the change in this over the life of the hedge is $0.40. The coefficient of correlation between the spot price change and futures price change is 0.95.
What is the minimum variance hedge ratio?
Should the hedger take a long or short futures position?
What is the optimal number of futures contracts with no tailing of the hedge?
What is the optimal number of futures contracts with tailing of the hedge?
The cash prices of six-month and one-year Treasury bills are
94.0 and 89.0. A 1.5-year bond that will pay coupons of $4 every
six months currently sells for $94.84. A two-year bond that will
pay coupons of $5 every six months currently sells for $97.12.
Calculate the six-month, one-year, 1.5-year, and two-year zero
rates.
A bank can borrow or lend at LIBOR. Suppose that the six-month rate is 5% and the nine-month rate is 6%. The rate that can be locked in for the period between six months and nine months using an FRA is 7%. What arbitrage opportunities are open to the bank? All rates are continuously compounded.
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A trader owns 55,000 units of a particular asset and decides to
hedge the value of...
A trader owns 55,000 units of a particular asset and wants to hedge the value of...
A trader owns 55,000 units of a particular asset and wants to hedge the value of his position with futures contracts on another related asset. Each futures contract is on 5,000 units. The spot price of the owned asset is $28 and the standard deviation of its price change is $0.45. The futures price of the related asset is $27 and the standard deviation of price change is estimated to be $0.40. The correlation between the spot price of the...
4.23. The cash prices of 6-month and 1-year Treasury bills are 94.0 and 89.0. A 1.5-year...
4.23. The cash prices of 6-month and 1-year Treasury bills are 94.0 and 89.0. A 1.5-year Treasury bond that will pay coupons of $4 every 6 months currently sells for $94.84. A 2-year Treasury bond that will pay coupons of $5 every 6 months currently sells for $97.12. Calculate the 6-month, 1-year, 1.5-year, and 2-year Treasury zero rates 4.24. "An interest rate swap where 6-month LIBOR is exchanged for a fixed rate of 5% on a
In January, See Us First Bank offers a client firm a $ 100 million loan for...
In January, See Us First Bank offers a client firm a $ 100 million loan for one year with the following terms: • The interest payments are due every six months. • The interest rate is determined every six months at the rate on the 3-month commercial paper on that day. That is, the rate for the SIX-MONTH period from July 1st until December 31st will be determined on July 1st. at the 3-month commercial paper spot rate. There are...
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You need to hedge the risk in a stock portfolio that your company owns in it's...
You need to hedge the risk in a stock portfolio that your company owns in it's pension plan using the E-mini S&P500 futures contracts (that has a multiplier of 50). The current value of the portfolio is $325 million and the S&P500 is currently at 2637.72 while the futures price for the next month delivery is at 2643.25. You estimate that the beta of this portfolio is 1.1 while the beta of the S&P500 is 1. What position do you...
10. What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides...
10. What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. A. The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year. B. The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the...
1. Jennifer Magnussen, a currency trader for Chicago-based Black River Investments, uses the following futures quotes...
1. Jennifer Magnussen, a currency trader for Chicago-based Black River Investments, uses the following futures quotes on the British pound to speculate on the value of the British pound. British Pound Futures, US$/pound (CME) Contract = 62,500 pounds Open Maturity Open High Low Settle Change High Interest March 1.4246 1.4268 1.4214 1.4228 0.0032 1.4700 25,605 June 1.4164 1.4188 1.4146 1.4162 0.0030 1.4550 809 a) If Jennifer buys 3 March pound futures, and the spot rate at maturity is $1.4560/pound, what...
Assume that a bank obtains most of its funds from large CDs with a one year...
Assume that a bank obtains most of its funds from large CDs with a one year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be _______ affected if interest rates increase. To partially hedge its position, it could _______ futures contracts. adversely; purchase favorably; sell favorably; purchase adversely; sell
NEW R 3. A Canadian company pays $300,000 consulting fee to a U.S. consulting company in...
NEW R 3. A Canadian company pays $300,000 consulting fee to a U.S. consulting company in San Diego. Which of the following account in the U.S. balance of payment statement will be affected by the cross-border transaction? A) Current account B) Capital account C) Foreign reserve account D) Unilateral payment account 6. Newstar, Inc., based in the U.S., exports products to a German firm and will receive E100,000 in six months. On February 1, the spot rate of the euro...
(4) The notional amount of a derivative instrument is a. related to the number of units...
(4) The notional amount of a derivative instrument is a. related to the number of units specified in the derivative and the price that relates to the asset or liability underlying the derivative. b. the change in the price or rate that relates to the asset or liability underlying the derivative. c. the price or rate that relates to the asset or liability underlying the derivative. d. the number of units that is specified in the derivative instrument. (5) Forward...
4.23. The cash prices of 6-month and 1-year Treasury bills are 94.0 and 89.0. A 1.5-year Treasury bond that will pay coupons of $4 every 6 months currently sells for $94.84. A 2-year Treasury bond that will pay coupons of $5 every 6 months currently sells for $97.12. Calculate the 6-month, 1-year, 1.5-year, and 2-year Treasury zero rates 4.24. "An interest rate swap where 6-month LIBOR is exchanged for a fixed rate of 5% on a
In January, See Us First Bank offers a client firm a $ 100 million loan for one year with the following terms: • The interest payments are due every six months. • The interest rate is determined every six months at the rate on the 3-month commercial paper on that day. That is, the rate for the SIX-MONTH period from July 1st until December 31st will be determined on July 1st. at the 3-month commercial paper spot rate. There are...
10. What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. A. The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year. B. The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the...
NEW R 3. A Canadian company pays $300,000 consulting fee to a U.S. consulting company in San Diego. Which of the following account in the U.S. balance of payment statement will be affected by the cross-border transaction? A) Current account B) Capital account C) Foreign reserve account D) Unilateral payment account 6. Newstar, Inc., based in the U.S., exports products to a German firm and will receive E100,000 in six months. On February 1, the spot rate of the euro...
(4) The notional amount of a derivative instrument is a. related to the number of units specified in the derivative and the price that relates to the asset or liability underlying the derivative. b. the change in the price or rate that relates to the asset or liability underlying the derivative. c. the price or rate that relates to the asset or liability underlying the derivative. d. the number of units that is specified in the derivative instrument. (5) Forward...
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