A company plans to borrow $10 million for 90 days, 180 days from today. The type of FRA and the position that the company should take on this FRA to hedge its interest rate risk is most likely: FRA Position A. 3 x 6 long B. 6 x 9 long C. 6 x 3 short
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9. A company plans to borrow $10 million for 90 days, 180 days from today. The type of FRA and the position that the company should take on this FRA to hedge its interest rate risk is most likely: FRA Position
A. 3 x 6 long
B. 6 x 9 long
C. 6 x 3 short
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- 15. A company needs to borrow £10 million for 6 months, 2 months from now. The type of FRA and the position it should take in order to hedge the interest rate risk of such transaction are: A. ‘2-6’ FRA Short position B. ‘2-6’ FRA Long position C. ‘2-8’ FRA Short position D. ‘2-8’ FRA Long position17. Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here: Security Price Today ($) Cash Flow in One Year ($) Cash Flow in Two Years ($) B1 94 0 100 0 B2 85 100 a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years? b. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years? c. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?13. Suppose that an FI holds two loans with the following characteristics. Annual Spread between Loan Rate and FI's Cost of Funds Loan X₁ 0.45 0.55 1 2 5.5% 3.5 Annual Fees 2.25% 1.75 Loss to Fl Expected Given Default Default Frequency 30% 20 3.5% 1.0 P12 = -0.15 Calculate the return and risk on the two-asset portfolio using Moody's Analytics Portfolio Manager.
- Q. 12. Consider a Financial Institution with the following assets and liabilities. Asset A has a maturity of 2 years and a market value of $50,000 and asset B has a maturity of 7 years and a market value of $80,000. Liability A has a maturity of 3 years and a market value of $40,000 and liability B has a maturity of 9 years and a market value of $10,000. What is the maturity gap of this FI (round your answer to two decimals)? a. 0.88 years. b. - 5 years. c. 5 years. d. 3.88 years. e. -1.47 years(b) A bank is looking to hedge its interest rate risk with a $100mm notional long put option (a FLOOR) of 10%, paying premium of 0.5% of face value. If interest rate falls to 8%, what is the net profit? (answer in mil) What kind of balance sheet should you expect the bank to have when buying this put option as a hedge? (i) (ii)DO not Answer Question 1-6, Only below question A-C needed. 21. Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 10 years $950 Duration = 2 years $860 Equity $90 What is the FI's duration gap? What is the FI's interest rate risk exposure? How can the FI use futures and forward contracts to put on a macrohedge? What is the impact on the FI's equity value if the relative change in interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 96. What is the impact on the FI's futures position if the relative change in all interest rates is an increase of 1 percent? That is, DR/(1+R) = 0.01. Assume that the deliverable Treasury bond has a duration of nine years. If the FI…
- 7. A. Define duration and explain how duration is used in the management of a portfolio of financial securities. B. Why is duration a better measurement of interest rate risk than the time it takes to reduce the principal balance on a loan by 50%? C. How does maturity and yield affect the sensitivity of a financial security to changes in interest rates?Q6. Consider an asset with a current market value of $400,000 and a duration of 5 years. Assume the asset is partially funded through a zero-coupon bond with a maturity (principal) value of $360,000 and has a maturity of 5 years. The current market rate is 6% and interest rates are expected to increase by 1%. Which of the following statements is true? The current equity value of the position is $661,976 and if interest rates increase the equity value will decrease. The current equity value of the position is $861,876 and if interest rates increase the equity value will increase. The current equity value of the position is $450,000 and if interest rates increase the equity value will remain unchanged. The current equity value of the position is $130,987 and if interest rates increase the equity value will decrease. The current equity value of the position is $40,000 and if interest rates increase the equity value will decrease.Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here: Security Price Today Cash Flow in One Year Cash Flow in Two Years B1 $192 $200 0 B2 $176 0 $200 What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $200 in two years? What is the no-arbitrage price of a security that pays cash flows of $200 in one year and $1600 in two years? Suppose a security with cash flows of $100 in one year and $200 in two years is trading for a price of $260. What arbitrage opportunity is available?
- D3) The value of a derivative that pays off $100 after one year if a company has defaulted during the year is $5. The value of a derivative that pays off $100 after one year if a company has not defaulted is $97. (a) What is the risk-free rate? (b) What is the risk-neutral probability of default?28. Consider a bank dealer who faces the following spot rates and interest rates. What should he set his 1- year forward ask price at? Bid So(S/E) S1.42 = €1.00 F360(S/E) A. $1.4324/€ B. $1.4358/€ C. $1.4662/€ D. $1.4676/€ Ask $1.45 = €1.00 Borrowing 4.25% APR is je 3.10% APR Lending 4% APR 3% APRb. Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, A-rated corporate bond. The current real risk-free rate is 5%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP Io.01(t-1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.2%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRR U.S. Treasury AAA corporate AA corporate A corporate Rate 0.83% 0.93 1.27 1.71 Corporate Bond Yield Spread - DRP + LP What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 7-year Corporate yield: 184.7 0.10% 0.44 0.88 % %