Management Chapter 22 2 Based on the estimate of gain or loss in question 108, what is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable

77. In a credit forward contract transaction

78. What is the purpose of a credit forward agreement?

79. Selling a credit forward agreement generates a payoff similar to

80. XYZ Bank lends $20,000,000 to ABC Corporation which has a credit rating of BB. The spread of a BB

rated benchmark bond is 2.5 percent over the U.S. Treasury bond of similar maturity. XYZ Bank sells a

$20,000,000 one-year credit forward contract to IWILL Insurance Company. At maturity, the spread of the

benchmark bond against the Treasury bond is 2.1 percent, and the benchmark bond has a modified duration of 4

years. What is the amount of payment paid by whom to whom at the maturity of the credit forward contract?

81. Catastrophe futures contracts

82. Who are the common buyers of credit forwards?

83. What is the reason for decrease in the number of futures contract needed to hedge a cash position in case of

tailing the hedge?

84. Which of the following is NOT true regarding hedge ratio?

85. What does R2 =0 indicate?

86. What does a low value of R2 indicate?

87. The uniform guidelines issued by bank regulators for trading in futures and forwards

88. For questions 88 to 94, use the following two choices to identify whether each intermediary or entity is a net

buyer or net seller of credit derivative securities.

89. What is the basis on the T-bill futures contract?

90. Calculate the cash flows on the above futures contract if all interest rates increase by 1.49 percent. (That is,

R/(1 + R) = 1.49 percent, and 1 bp = $25.)

91. An investor buys a $100,000 Treasury bond futures contract at 99-13/32nds. The following day the Treasury

bond futures settlement price is 99-26/32nds. What is the one-day profit or loss on the Treasury bond futures

position?

92. An investor sold a $100,000 Treasury bond futures contract at 99-02/32nds yesterday. Today the Treasury

bond futures settlement price is 99-31/32nds. What is the one-day profit or loss on the Treasury bond futures

position?

93. The bank’s portfolio manager wants to shorten asset maturities. Which of the following statements is true?

94. If the portfolio manager wants to shorten the bank’s asset maturity, what type of risk is she concerned

about?

95. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest

rates?

96. If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures

hedge position?

97. If T-bond futures prices decrease to 81-27/32nds, what is the value of the futures hedge position?

98. If the portfolio manager put on the hedge in question 102 (89-00/32nds), what is the profit/loss on the

futures position given the settlement price in question 103 (81-27/32nds)?

99. The portfolio manager for Conyers Bank wishes to sell the entire issue of Treasury bonds at a current price

of 87-05/32nds. What will be the gain or loss on the cash position since the futures contract was placed? (That

is, since the bonds were valued at $28,387,500.)

100. Assume that the portfolio manager sells the bonds at the price in question 105 (87-05/32), and that she

closes out the futures hedge position at the price in question 103 (81-17/32). What will be the net gain or loss on

the entire bond transaction from the time that the hedge was placed?

101. What is the leveraged-adjusted duration gap of the bank’s portfolio?

102. What is the change in the value of the FI‘s equity for a 1 percent increase in interest rates from the current

rates of 10 percent (i.e., R = +0.01, and 1+R =1.10)?

103. Based on the estimate of gain or loss in question 108, what is the number of T-bond futures contracts

necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of

the futures contract is $96 per $100 face value?

104. Based on the estimate of gain or loss in question 108, what is the number of T-Bill futures contracts

necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price

of the futures contract is $98 per $100 face value?

105. How would your results to question 109 change if basis risk shows that for every 1 percent shock to

interest rates, i.e., R = 0.01 and 1+R =1.10, the implied rate on the deliverable bonds in the futures market

increases by 1.1 percent, i.e., Rf/(1+Rf) = .011?

106. What is the gain or loss on the futures position using T-Bonds if the shock to interest rates is 0.01, i.e.

R/(1+R) = .01 Þ Rf/(1+Rf) = .01?

107. If the exchange rate remains the same, what is the dollar spread earned by the bank at the end of the year?

108. If at the end of the year, the exchange rate is $1.65/, what is the spread earned on the loan by the FI in

dollars after adjusting fully for exchange rates?

109. If the current (spot) rate for one-year British pound futures is currently at $1.58/ and each contract size is

62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound

exposure? (Assume no basis risk).

110. What is the cash spread earned by the FI if at the end of the year the  is trading at $1.63/ in the cash

market? Again adjust for all exchange rate changes.

111. Assume that the hedge was placed at the rates in question 114, and that the BP futures contract is trading at

$1.62/. Assume the futures contract has some days remaining to maturity. What will be the gain or loss on the

hedge if it is unwound at this price?

112. What is the net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/

in the cash market and 1.62/ in the futures market? Assume that the futures position is opened and unwound as

stated in questions 114 and 116.

113. What should be the trading price of the BP futures contract at the end of the year in order for the FI to be

perfectly hedged? That is, the FI earns its original anticipated spread without any effects of exchange rate

changes?

114. What type of currency hedge is necessary to protect the FI from exchange rate risk?

115. How many currency contracts are necessary to hedge this asset?

116. Your position is exposed to:

117. If you wanted to hedge your bank’s risk exposure, what hedge position would you take?

118. If in one year there is no change in either interest rates or exchange rates, what is the end-of-year profit or

loss of your bank’s cash position? Assume that annual interest is paid on both the CD and the Canadian bonds

on the date of liquidation in exactly one year.

119. What is the end-of-year profit or loss on the bank’s cash position if in one year the exchange rate falls to

US$0.765/C$1? Assume there is no change in interest rates.

120. What is the end-of-year profit or loss on the bank’s cash position if in one year Canadian bond rates

increase to 7.5 percent? Assume no change in either current U.S. interest rates or current exchange rates.

121. What is the end-of-year profit or loss on the bank’s cash position if in one year both Canadian bond rates

increase to 7.5 percent and the exchange rate falls to US$0.765 per Canadian dollar (Assume no change in U.S.

interest rates.)

122. If Canadian dollar futures prices fall $.0199 per Canadian dollar from today’s settlement prices, and there is

no basis risk, what is the profit/loss on the futures position if the bank fully hedges currency risk?

123. If Treasury note futures prices fall to 98-17 in one year, what is the profit/loss on the futures position if the

bank fully hedges interest rate risk exposure? Assume that the duration of the Canadian bonds is the same as the

duration of Treasury note futures.