EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
expand_more
expand_more
format_list_bulleted
Question
Chapter 22, Problem 5CP
A
Summary Introduction
To explain: The generation of positive cash flow by selling futures bonds in a rising rate of interest prior to the maturity of the futures contract.
Introduction: The future trading is performed between two parties like buyer and seller. The commodities are exchanged in future at predetermined price.
B
Summary Introduction
To explain: Compare the cost price of the future contract at higher price with the spot price of bonds prior to the maturity.
Introduction: Vanhusen suggested that carry price of the future bonds are higher than the spot prices of the prior bonds. Future contract is an agreement between buyer and seller for the future time to exchange commodities at specific price.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors):
the relative duration of bank assets and
the duration of the underlying security named in the futures
the price of the futures
All of the options are correct
A financial institution that uses a long hedge is most likely:
trying to avoid higher borrowing
trying to avoid declining asset
trying to avoid lower than expected yields from loans and
trying to avoid higher borrowing costs or trying to avoid declining asset
An advantage of interest rate swap is that:
it can help protect from interest rate
it can help closely match the maturities of assets and
it can help transform actual cash flows to more closely match desired cash flow
All of the options are correct
Default risk on bonds can be evaluated by using:
financial analysis
bond ratings
estimates of potential losses on bonds
a and b…
Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?
a. Forward contracts can be tailored, while future contracts are non-standardized.
b. Forward contracts are classified as exotic derivatives.
c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house.
d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity.
e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.
The reading below deals with some typical swaption strategies and the factors that originate them. First, read it carefully. Lehman Brothers and Credit Suisse First Boston are recommending clients to buy long-dated swaption vol ahead of the upcoming US Federal Open Markets Committee meeting. In the trade, the banks are recommending clients to buy long-dated swaption straddles, whose value increases if long-dated swaption vol rises. Mortgage servicers and investors are keen to hedge refinancing risk with swaptions as interest rates fall, meaning that long-dated swaption vol should rise over the next several months, said an official at CSFB in New York. The traditional supply of swaption vol has been steadily decreasing over the last year, said (a trader) in New York. Agencies supply vol to dealers mainly via entering swaps with embedded options on the back of issuing callable notes. Over the past year, demand for callable notes has been decreasing due to high interest rate volatility,…
Knowledge Booster
Similar questions
- Several investment committee members have asked about interest rate swap agreements and how they are used in the management of domestic fixed-income portfolios. 1. Define an interest rate swap and briefly describe the obligation of each party involved 2.Cite and explain two examples of how interest rate swaps could be used by a fixed-income portfolio manager to control risk or improve return.arrow_forwardDetermine which of the following is NOT a distinguishing characteristic of futures contracts, relative to forward contracts. Question * A. Contracts are settled daily, and marked-to-market. B. Contracts are more liquid, as one can offset an obligation by taking the opposite position. C. Contracts are more customized to suit the buyer’s needs. D. Contracts are structured to minimize the effects of credit risk. E. Contracts have price limits, beyond which trading may be temporarily halted.arrow_forwardThis question is about futures risk premia. Consider a two period economy.You can buy stocksin period 0, and then sell them in period 1. You can also enter into futures contracts in period 0, whichexpire in period 1. Since buying single-stock futures appears to be a fairly profitable trade, you decide toinvest in a futures strategy. You enter a long futures contract position. You also invest cash in period 0 at the risk-free rate, so you have just enough topay for the futures contract at expiration. You plan to sell the stock just after expiration. What is theexpected return on this trading strategy (in terms of expected period-1 dollars you get, per period-0dollar invested)?arrow_forward
- Several investment committee members have asked about interest rate swap agreements and how they are used in the management of domestic fixed-income portfolios. (i) Define an interest rate swap and briefly describe the obligation of each party involved (ii) Cite and explain two examples of how interest rate swaps could be used by a fixed-income portfolio manager to control risk or improve return.arrow_forwardThe basis is defined as spot minus futures prices. Evaluate which of the following is most likely to contribute to an increase in basis risk. Select one alternative A large difference between the futures prices when the hedge is put in place and when it is closed out. Increased similarity between the underlying asset of the futures contract and the hedger’s exposure. An increase in the time between the date when the futures contract is closed and its delivery month. None of the other answers.arrow_forwarda) If you must buy some asset in future and you just want to hedge the risk what sort of derivative trading will you do? Explain in brief with payoff diagram. b) If you have long position in one asset and you want to hedge the risk of price drop in that asset while still having the upside in case the asset price goes up, what sort of derivative trading will you do? Explain in brief with payoff diagram. c) Briefly explain the benefits of having a thriving capital markets even in an economy like India where banking system provides most of the funding to firms. d) What are the four types of traders? Name two types who facilitate the price discovery process and briefly state how do they facilitate?arrow_forward
- Organized exchanges offer important advantages like (a) mitigating credit risk and (b) providing liquidity. But they have the following market imperfections: 1. Open interest in futures contracts declines for longer maturities; so, for liquidity reasons, you may be unable to hedge longer deliveries using longer maturity futures contracts. Explain briefly how you would overcome these market imperfections.arrow_forwardJaleel knows that the primary purpose of a futures contract is the management ofrisk exposures. Use Qantas Airlines as an example to further explain how a futurescontract achieves this risk management function.arrow_forwardNote:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- A risk manager uses a futures contract, which has a correlation of 0.88 with the spot asset, to hedge her exposure. She calculates a hedge ratio of 0.9429. What part of the cash flow remains unhedged? None of these O 5.71% O 77.44% 22.56%arrow_forwardElizabeth intends to use the Hang Seng Index (HSI) futures to hedge her portfolio. Which of the followings is her least concern with respect to using the HSI futures contract? a) Expiry of the futures contract b) Current level of Hang Seng Index c) Systematic risk of her portfolio d) Volatility of the stock market e) Risk‐free ratearrow_forwardAssess the following statement: 1. If investors were indifferent to maturities, the return of any security should equal the compounded yield of consecutive investments in shorter-term securities. II. The forward rate is sometimes used as an approximation of the market's consensus interest rate forecast. The reason is that, if the market had a different perception, the demand and supply of today's existing two-year and one-year securities would adjust to capitalize on this information. III. According to pure expectations theory, the term structure of interest rates is determined solely by expectations of interest rates. O Only one statement is correct. All statements are correct. O No answer text provided. O Only one statement is incorrect.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
