Futures price
Bond par value
New futures price
Margin requirement
You purchase a Treasury-bond futures contract with an initial margin
requirement of 15% and a futures price of $115,098. The contract is traded
on a $100,000 underlying par value bond. If the futures price falls to
$108,000, what will be the percentage loss on your position?
S&P 500 index price
S&P 500 dividend yield
Risk free rate
Suppose the value of the S&P 500 Stock Index is currently $1,800. If the
one-year T-bill rate is 3% and the expected dividend yield on the S&P 500
is 2%, what should the one-year maturity futures price be? What if the T-
bill rate is less than the dividend yield, for example, 1%?
Contract size (shares)
1 yr t-bill rate
Price per share
Forecasted price drop
Margin
Solution
One Chicago has just introduced a new single stock futures contract on
the stock of Brandex, a company that currently pays no dividends. Each
contract calls for delivery of 1,000 shares of stock in one year. The T-bill
rate is 6% per year.
a. If Brandex stock now sells at $120 per share, what should the futures
price be?
b. If the Brandex stock price drops by 3%, what will be the change in the
futures price and the change in the investor’s margin account?
c. If the margin on the contract is $12,000, what is the percentage return
on the investor’s position?
Corporate bond issue million
Rate over LIBOR
LIBOR
Solution
A corporation has issued a $10 million issue of floating-rate bonds on
which it pays an interest rate 1% over the LIBOR rate. The bonds are
selling at par value. The firm is worried that rates are about to rise, and it
would like to lock in a fixed interest rate on its borrowings. The firm
sees that dealers in the swap market are offering swaps of LIBOR for
7%. What swap arrangement will convert the firm’s borrowings to a
synthetic fixed-rate loan? What interest rate will it pay on that synthetic
fixed-rate loan?