Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, yielding 11.9 percent if the futures has a price of $90,000, a duration of 8.5 years and an implied yield of 9.5 percent.
a. 16.27
b. 16.63
c. 7.42
d. 11.11
e. none of the above
which of the following is the interpretation of a VAR of $5 million for one year at .05.
a. the probability is .05 that the firm will lose at least $5 million in one year
b. the probability is at least .05 that the firm will lose $5 million in one year
c. the probability is .05 that the firm will lose $5 million in one year
d. the probability is less than .05 that the firm will lose $5 million in one year none of the above
25. Which of the following are not methods of determining the VAR?
a. simulation method
b. historical method
c. estimation method
d. analytical method
e. none of the above
Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be combined with this swap to produce a swap to produce a plain vanilla Interest rate swap (pay fixed and receive floating) in currency B.
a. pay currency B floating, receive currency A fixed
b. pay currency B fixed, receive currency A floating
c. pay currency B fixed, receive currency A fixed
d. pay currency B floating, receive currency A floating
e. none of the above
Each of the following is a benefit of practicing risk management by companies except
investment opportunities
companies can manage risk better than their shareholders
risk management can avoid bankruptcy costs
risk management can lower taxes
risk management can increase employment opportunities
risk management can help prevent companies from passing up valuable
Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock index 1 and party B pays the return on stock index 2. The notional principal is $25 million. Stock index 1 starts the period at 1500 and goes up to 1600 at the end of the period. Stock index 2 starts the period at 3500 and goes up to 3300 at the end of the period.
The party paying index 1 pays about $238,000
The party paying index 2 pays about $238,000
The party paying index 2 pays about $3.095 million
The party paying index 1 pays about $25 million
The party paying index 1 pays about $3.095 million
The advantage of a collar over a cap is
it offers the possibility of greater returns
it lowers the out-of-pocket cost
it eliminates the risk
it has lower transaction costs
Question 2 - answer =(a)
Question 3 - answer =(d) none of the above because VAR has 3 types of methods - historical method, covariance-variance method (uses expected or estimated values) and monte carlo simulation (analytical method)
Question 4 - answer =(b)
Question 5 - answer =(e)
Question 7 - answer (d)
Since in a collar there is ceiling on both high and low amount, we are selling call up to a higher level and selling put upto to a level below. Hence, transaction costs are minimized since we are obtaining premiums and in cap we pay premium
Question 1-
Bond | Futures | PORTFOLIO | |||||||
Market value | 1,000,000 | 90,000 | 1,090,000.0 | Hedge ratio | |||||
WEIGHT | 0.917 | 0.083 | bond duration/forward duration | bond forward value | P*Dp/Fc.Df | ||||
How long does it take to earn back bond price through cash flows | DUR | 12.45 | 8.5 | 12.1 | 1.46 | 1,464,705.9 | (forward value*duration of portfolio)/(futures price*duration of bond) | ||
YTM | 11.90% | 9.50% | 15.8 |
Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, y...
4. A French wine maker is considering a currency swap that will call for the firm to pay dollars and receive Euros. The dollar notional principal will be $100 million. The swap calls for semiannual payments with a 180/360 adjustment. The current exchange rate is $1.60/ The term structure of the dollar and Euro LIBOR on the day of swap initiation is as follows # of days until payment | Dollar LIBOR ( Euro LIBOR 180 360 540 720 7.00...
1 Netflix Co. that has been floating rate notes now believes that interese rise I decides to protect itself nainst this possibility by entering into an in rate swap with a dealer. In this swap, the notional principal is $80 million and the company will pay a fixed rate of 5.5 percent and receive LIBOR. The current LIROU is 5 percent. Calculate the first payment and indicate which party (Netflix or the dealer) prys which Assume that payments will be...
Can anyone answer the question and explain it thx alot 22. Jet engine manufacturing entails enormous economies of scale. Pratt & Whitney, a large U.S. jet engine producer, faces substantial competition from Rolls-Royce, the British engine manufacturer. What would be the BEST way for P&W to cope with a dollar that has recently appreciated by 50%? a) accelerate R&D spending and cost-cutting efforts b) shift some of its production abroad c) raise the foreign currency prices of its engines sold...
Module 9 – Foreign Exchange Rate Risk Homework Exercise Part 1 1. Suppose that the EUR:USD is trading at 1.3342; the GBP:JPY is trading at 67.7600; and the EUR:GBP is trading at 0.8165. What should the USD:JPY rate be? 2. If a price index for US goods stands at 118.93 and the same price index for European goods (i.e., computed from the same consumption basket) stands at 183.34; what is the fair (under the theory of PPP) spot exchange rate...
CCC Conglomerates is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $378,000, annual operating costs of $22,000, and a 3-year life. Machine B costs $257,000, has annual operating costs of $43,000, and a 2-year...
Jennifer is interested in the mutual fund RBC U.S. Index Fund – Series A. She has a few questions for you before she buys this investment. a) Does the reported fund’s return include the Management Expense Ratio (MER) ? Yes or No b) What type of fee is charged: No-load, Front-end load or a Back-end load? c) Is the status of this mutual fund classified as a closed-end or open-end mutual fund? d) Based on your response in c), explain...
Quich Books tAss M MULTIPLE CHOICE (2 PTS EACH) CHOOS THE BEST ANSWER 1. The Banking section of the Home Page includes which flow chart? A. Payroll flowchart B. Bank Reconciliation flowchart C. Bill Pay flow chart D. None of these 2. Which financial statement below summarizes the financial position of a company? A. Statement of Cash Flows B. Profit &Loss Statement C. Balance Sheet D. Income Statement Which financial statement below summarizes a company's earnings? A. Statement of Cash...
MULTIPLE CHOICE 1) Which of the following is NOT an investment as defined in the text? A) a certificate of deposit issued by a bank B) a new automobile C) a United States Saving Bond D) a mutual fund held in a retirement account 2) Which of the following is NOT traded in the securities markets? A) stocks B) bonds C) derivatives D) real estate 3) The governmental agency that oversees the capital markets is the A) Federal Trade Commission....
A homeowners' policy will typically pay up to $500 per plant that is damaged by a covered peril. This is an example of: an aggregate dollar limit an open perils dollar limit C. a specific dollar limit a mixed dollar limit none of the above e. You purchase an annuity for which you will make one payment of $15,000 on your 50 birthday. The annuity will start paying you $400 a month on your 67" birthday until you die. What...
CASE 1-5 Financial Statement Ratio Computation Refer to Campbell Soup Company's financial Campbell Soup statements in Appendix A. Required: Compute the following ratios for Year 11. Liquidity ratios: Asset utilization ratios:* a. Current ratio n. Cash turnover b. Acid-test ratio 0. Accounts receivable turnover c. Days to sell inventory p. Inventory turnover d. Collection period 4. Working capital turnover Capital structure and solvency ratios: 1. Fixed assets turnover e. Total debt to total equity s. Total assets turnover f. Long-term...