Chapter 15 – Forward, Futures, and Swap Contracts
b.
buy 50,000 contracts
c.
sell 5,000,000 contracts
d.
sell 5,000 contracts
e.
sell 500 contracts
58. Refer to Exhibit 15.2. What is the dollar gain or loss assuming that future conditions described in Case 1 actually
occur? (Ignore commissions and margin costs .)
a.
$47,316,683.00 gain
b.
$36,566,683.00 loss
c.
$10,750,000.00 gain
d.
$10,750,000.00 loss
e.
$0
59. Refer to Exhibit 15.2. What is the dollar gain or loss assuming that future conditions described in Case 2 actually
occur? (Ignore commissions and margin costs .)
a.
$19,500,000.00 gain
b.
$27,816,683.04 gain
c.
$27,816,683.04 loss
d.
$19,500,000.00 loss
e.
$0
Chapter 15 – Forward, Futures, and Swap Contracts
Exhibit 15.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you
about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level
of LIBOR at the beginning of each quarter. As is the bank’s convention on all such loans, the amount of the interest
payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You
observe the following LIBOR yield curve in the cash market:
4.70%
4.85%
5.10%
5.40%
60. Refer to Exhibit 15.3. If 90-day LIBOR rises to the levels “predicted” by the implied forward rates, what will the
dollar level of the bank’s interest receipt be at the end of the first quarter?
a.
$35,250.00
b.
$36,375.00
c.
$38,250.00
d.
$40,500.00
e.
$0
61. Refer to Exhibit 15.3. What is the implied 90-day forward rate at the beginning of the second quarter?
a.
4.70%
b.
4.85%
c.
4.60%
d.
4.94%
Chapter 15 – Forward, Futures, and Swap Contracts
e.
0%
62. Refer to Exhibit 15.3. If 90-day LIBOR rises to the levels “predicted” by the implied forward rates, what will the
dollar level of the bank’s interest receipt be at the end of the second quarter?
a.
$40,500.00
b.
$38,250.00
c.
$35,250.00
d.
$37,064.25
e.
$34,500.00
63. Refer to Exhibit 15.3. What is the implied 90-day forward rate at the beginning of the third quarter?
a.
5.10%
b.
5.47%
c.
4.70%
d.
4.85%
e.
0%
64. Refer to Exhibit 15.3. If 90-day LIBOR rises to the levels “predicted” by the implied forward rates, what will the
dollar level of the bank’s interest receipt be at the end of the third quarter?
a.
$35,250.00
b.
$36,375.00
c.
$38,250.00
d.
$41,005.50
e.
$0
65. Refer to Exhibit 15.3. What is the implied 90-day forward rate at the beginning of the fourth quarter?
a.
6.19%
b.
5.10%
c.
6.07%
d.
5.68%
e.
0%
66. Refer to Exhibit 15.3. If 90-day LIBOR rises to the levels “predicted” by the implied forward rates, what will the
dollar level of the bank’s interest receipt be at the end of the fourth quarter?
a.
$36,223.50
b.
$40,500.00
c.
$38,250.00
d.
$36,375.00
e.
$0
Chapter 15 – Forward, Futures, and Swap Contracts
67. Refer to Exhibit 15.3. If the bank wanted to hedge its exposure to falling LIBOR on this loan commitment, describe
the sequence of transactions in the futures markets it could undertake.
a.
buy three Eurodollar futures contracts that expire at the end of the first quarter
b.
buy three Eurodollar futures contracts that expire at the end of the first quarter, three that expire at the end of
the second quarter, and three that expire at the end of the third quarter.
c.
sell three Eurodollar futures contracts that expire at the end of the year.
d.
sell one Eurodollar futures contract that expires at the end of the first quarter, one that expires at the end of the
second quarter, and one that expires at the end of the third quarter.
e.
buy three Eurodollar futures contracts that expire at the end of the year.
68. Refer to Exhibit 15.3. Assuming the yields inferred from the Eurodollar futures contract prices for the next three
settlement periods are equal to the implied forward rates, calculate the dollar value of the annuity that would leave the
bank indifferent between making the floating-rate loan and hedging it in the futures market and making a one-year fixed-
rate loan.
a.
$49,312.36
b.
$35,120.62
c.
$39,036.45
d.
$44,452.36
e.
$0
69. Refer to Exhibit 15.3. Assuming the yields inferred from the Eurodollar futures contract prices for the next three
settlement periods are equal to the implied forward rates, calculate, in annual (360-day) percentage terms, the annuity that
would leave the bank indifferent between making the floating-rate loan and hedging it in the futures market and making a
one-year fixed-rate loan.
a.
20.86%
b.
5.10%
c.
4.91%
d.
5.20%
e.
0%
70. A bond portfolio manager expects a cash inflow of $12,000,000. The manager plans to hedge potential risk with a
Treasury futures contract with a value of $105,215. The conversion factor between the CTD and the bond specified in the
Treasury futures contract is 0.85. The duration of bond portfolio is eight years, and the duration of the CTD bond is 6.5
years. Indicate the number of contracts required and whether the position to be taken is short or long.
a.
114 contracts short
b.
114 contracts long
c.
119 contracts short
d.
119 contracts long
e.
100 contracts long
71. A bond portfolio manager expects a cash outflow of $35,000,000. The manager plans to hedge potential risk with a
Treasury futures contract with a value of $105,215. The conversion factor between the CTD and the bond specified in the
Treasury futures contract is 0.85. The duration of bond portfolio is eight years, and the duration of the CTD bond is 6.5
years. Indicate the number of contracts required and whether the position to be taken is short or long.
a.
333 contracts short
b.
333 contracts long
c.
348 contracts short
d.
348 contracts long
e.
300 contracts long
Exhibit 15.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A three-month T-bond futures contract (maturity 20 years, coupon 6 percent, face $100,000) currently trades at
$98,781.25 (implied yield 6.11 percent). A three-month T-note futures contract (maturity 10 years, coupon 6 percent, face
$100,000) currently trades at $101,468.80 (implied yield 5.80%). Assume semiannual compounding.
72. Refer to Exhibit 15.4. If you expected the yield curve to steepen, the appropriate NOTE AGAINST BOND futures
spread strategy would be
a.
go long the T-bond and short the T-note.
b.
go short the T-bond and long the T-note.
c.
go long the T-bond and long the T-note.
d.
go short the T-bond and short the T-note.
e.
None of these are correct.
73. Refer to Exhibit 15.4. If you expected the yield curve to flatten, the appropriate note against bond futures spread
strategy would be
a.
go long the T-bond and short the T-note.
b.
go short the T-bond and long the T-note.
c.
go long the T-bond and long the T-note.
d.
go short the T-bond and short the T-note.
e.
None of these are correct.
74. Refer to Exhibit 15.4. Suppose the yield curve changed so the that the new yield on the T-bond contract rose to 6.5
percent, and the new yield on the T-note contract fell to 5.5 percent. Calculate the profit on the note against bond futures
spread. (Assume coupons are paid semiannually)
a.
−$5850.92
b.
−$6,671.42
c.
$6,671.42
d.
$5850.92
e.
$4550.42
Exhibit 15.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures markets
T-Bill
Eurodollar
September
93.25
92.35
75. Refer to Exhibit 15.5. If you expected the TED spread to widen over the next month, then an appropriate strategy
would be to
a.
go long T-Bill futures and long Eurodollar futures.
b.
go short T-Bill futures and short Eurodollar futures.
c.
go long T-Bill futures and short Eurodollar futures.
d.
go short T-Bill futures and long Eurodollar futures.
e.
None of these are correct.
76. Refer to Exhibit 15.5. Assume that a month later the price of the September T-Bill future is 93 and the price of the
Eurodollar future is 90.25. Calculate the profit on the T-Bill futures position.
a.
25 basis points
b.
110 basis points
c.
−25 basis points
d.
−110 basis points
e.
50 basis points
77. Refer to Exhibit 15.5. Assume that a month later the price of the September T-Bill future is 93 and the price of the
Eurodollar future is 90.25. Calculate the profit on the Eurodollar futures position.
a.
190 basis points
b.
210 basis points
c.
−190 basis points
d.
−210 basis points
e.
100 basis points
Chapter 15 – Forward, Futures, and Swap Contracts
Exhibit 15.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures markets
T-Bill
Eurodollar
September
95.24
94.6
78. Refer to Exhibit 15.6. If you expected the spread to narrow over the next month, then an appropriate strategy would be
to
a.
go long T-Bill futures and long Eurodollar futures.
b.
go short T-Bill futures and short Eurodollar futures.
c.
go long T-Bill futures and short Eurodollar futures.
d.
go short T-Bill futures and long Eurodollar futures.
e.
None of these are correct.
79. Refer to Exhibit 15.6. Assume that a month later the price of the September T-Bill future is 96.25 and the price of the
Eurodollar future is 95.9. Calculate the profit on the T-Bill futures position.
a.
101 basis points
b.
130 basis points
c.
−101 basis points
d.
−130 basis points
e.
29 basis points
80. Refer to Exhibit 15.6. Assume that a month later the price of the September T-Bill future is 96.25 and the price of the
Eurodollar future is 95.9. Calculate the profit on the Eurodollar futures position.
a.
101 basis points
b.
130 basis points
c.
−101 basis points
d.
−130 basis point.
e.
29 basis points
Exhibit 15.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year
loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of
LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows:
2.70%
2.85%
3.10%
3.40%
81. Refer to Exhibit 15.7. What will the dollar level of the bank’s interest receipt be at the end of the first quarter?
a.
$26,500
b.
$27,000
c.
$28,500
d.
$108,000
e.
$17,000
Chapter 15 – Forward, Futures, and Swap Contracts
82. Refer to Exhibit 15.7. What is the implied 90-day forward rate at the beginning of the second quarter?
a.
2.70%
b.
2.85%
c.
2.98%
d.
3.15%
e.
3.32%
83. Refer to Exhibit 15.7. What is the implied 90-day forward rate at the beginning of the third quarter?
a.
2.97%
b.
3.05%
c.
3.34%
d.
3.55%
e.
3.76%
84. Refer to Exhibit 15.7. A bond portfolio manager expects a cash inflow of $10,000,000. The manager plans to hedge
potential risk with a Treasury futures contract with a value of $102,150. The conversion factor between the CTD and the
bond specified in the Treasury futures contract is 0.88. The duration of bond portfolio is six years, and the duration of the
CTD bond is 4.5 years. Indicate the number of contracts required and whether the position to be taken is short or long.
a.
114 contracts short
b.
114 contracts long
c.
60 contracts short
d.
60 contracts long
e.
55 contracts long
Exhibit 15.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of
a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10 percent.
85. Refer to Exhibit 15.8. Calculate the current value of one contract.
a.
$100,000
b.
$103,600.5
c.
$103,187.5
d.
$102,306.3
e.
$104,293.5
86. Refer to Exhibit 15.8. Calculate the initial margin deposit.
a.
$10,000
b.
$10,360.50
c.
$10,318.75
d.
$10,230.63
e.
$10,429.35
87. Refer to Exhibit 15.8. If the futures contract is quoted at 105:08 at expiration, calculate the percentage return.
a.
1.99 percent
b.
19.99 percent
c.
20.62 percent
d.
25.37 percent
e.
−13.65 percent
88. In late January 2011, Starlight Corporation is considering the sale of $50 million in 10-year bonds rated AAA. The
issue will most likely be registered and sold some time in April. Therefore, Starlight Corporation desires to hedge the
pending issue using Treasury bond futures contracts, which each represent $100,000. Explain how you would go about
hedging the bond issue?
a.
sell 500 contracts
b.
buy 500 contracts
c.
sell 50 contracts
d.
buy 50 contracts
e.
buy 5000 contracts
89. Assume that you manage a $50 million equity portfolio. The portfolio beta is 0.85. You anticipate a cash inflow of $5
million into the portfolio. Calculate the number of contracts you would need to hedge your position and indicate whether
you would go short or long. Assume that the price of the S&P 500 futures contract is 1062 and the multiplier is 250.
a.
25 contracts short
b.
18 contracts short
c.
16 contracts long
d.
19 contracts short
e.
15 contracts short
90. Assume that you manage an equity portfolio. The portfolio beta is 1.15. You anticipate a decline in equity values and
wish to hedge $500 million of the portfolio. Calculate the number of contracts you would need to hedge your position and
indicate whether you would go short or long. Assume that the price of the S&P 500 futures contract is 1105 and the
multiplier is 250.
a.
2500 contracts short
b.
1810 contracts short
c.
1810 contracts long
d.
2081 contracts short
e.
2081 contracts long
91. Assume that you manage an equity portfolio. The portfolio beta is 1.15. You anticipate a rise in equity values and wish
to increase equity exposure on $500 million of the portfolio. Calculate the number of contracts you would need to hedge
your position and indicate whether you would go short or long. Assume that the price of the S&P 500 futures contract is
1105 and the multiplier is 250.
a.
2500 contracts short
b.
1810 contracts short
c.
1810 contracts long
d.
2081 contracts short
e.
2081 contracts long
Exhibit 15.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1100. The annualized interest rate is 3.5 percent, and the annualized dividend is 2 percent.
92. Refer to Exhibit 15.9. Calculate the price of the futures contract now.
a.
1108.59
b.
1102.75
c.
1139.79
d.
1123.19
e.
1350.15
93. Refer to Exhibit 15.9. If the futures contract was currently available for 1250, indicate the appropriate strategy that
would earn an arbitrage profit.
a.
long futures and short the index
b.
short futures and long the index
c.
long futures and long the index
d.
short futures and short the index
e.
None of these are correct.
94. Refer to Exhibit 15.9. If the futures contract was currently available for 1050, indicate the appropriate strategy that
would earn an arbitrage profit.
a.
long futures and short the index
b.
short futures and long the index
c.
long futures and long the index
d.
short futures and short the index
e.
None of these are correct.
95. Refer to Exhibit 15.9. If the futures contract was currently available for 1250, calculate the arbitrage profit.
a.
$0
b.
$133.41
c.
−$133.41
d.
$147.25
e.
−$147.25
Chapter 15 – Forward, Futures, and Swap Contracts
Exhibit 15.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a portfolio manager with a $20,500,000 equity portfolio under management. The manager wishes to hedge
against a decline in share values using stock index futures. Currently a stock index future is priced at 1250 and has a
multiplier of 250. The portfolio beta is 1.25.
96. Refer to Exhibit 15.10. Calculate the number of contract required to hedge the risk exposure and indicate whether the
manager should be short or long.
a.
100 contracts long
b.
82 contracts short
c.
82 contracts long
d.
100 contracts short
e.
50 contracts short
97. Refer to Exhibit 15.10. Assume that a month later the equity portfolio has a market value of $20,000,000 and the stock
index future is priced at 1150 with a multiplier of 250. Calculate the profit on the equity position.
a.
$100,000
b.
−$200,000
c.
$600,000
d.
−$500,000
e.
$400,000
98. Refer to Exhibit 15.10. Assume that a month later the equity portfolio has a market value of $20,000,000 and the stock
index future is priced at 1150 with a multiplier of 250. Calculate the profit on the stock index futures position.
a.
$1,550,000
b.
−$2,000,000
c.
$2,050,000
d.
−$5,000,000
e.
$2,400,000
99. Refer to Exhibit 15.10. Calculate the overall profit.
a.
$1,550,000
b.
−$2,000,000
c.
$2,050,000
d.
−$5,000,000
e.
$2,400,000
Exhibit 15.11
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chapter 15 – Forward, Futures, and Swap Contracts
As a portfolio manager, you are responsible for a $150 million portfolio, 90 percent of which is invested in equities, with
a portfolio beta of 1.25. You are utilizing the S&P 500 as your passive benchmark. Currently the S&P 500 is valued at
1202. The value of the S&P 500 futures contract is equal to $250 times the value of the index. The beta of the futures
contract is 1.0.
100. Refer to Exhibit 15.11. If you anticipate a cash inflow of $2 million next week, how many futures contracts should
you buy or sell in order to mitigate the effect of this inflow on the portfolio’s performance (rounded to the nearest
integer)?
a.
sell six contracts
b.
buy six contracts
c.
sell eight contracts
d.
buy eight contracts
e.
buy seven contracts
101. Refer to Exhibit 15.11. If you anticipate a cash outflow of $5 million next week, how many futures contracts should
you buy or sell in order to mitigate the effect of this outflow on the portfolio’s performance (rounded to the nearest
integer)?
a.
sell 21 contracts
b.
buy 21 contracts
c.
sell 17 contracts
d.
buy 17 contracts
e.
buy 13 contracts
102. Refer to Exhibit 15.11. How many contracts should you buy or sell in order to increase the portfolio beta to 1.30