4243 Final Exam Computation

Profit from T-bill Futures. Toland Company sold Treasury bill futures contracts when the quoted price was 94-00. When this position was closed out, the quoted price was 93-20. Determine the profit or loss per contract, ignoring transaction costs.

Selling price = $940,000 Purchase price = $932,000 Profit = $940,000 - $932,000 = $8,000

Profit from T-bond Futures. R. C. Clark sold a futures contract on Treasury bonds that specified a price of 92-10. When the position was closed out, the price of Treasury bond futures contract was 93-00. Determine the profit or loss, ignoring transaction costs.

Selling price= $92,312 Purchase price= $93,000 Profit = $92,312 - $93,000= -$688

Logan bank had interest revenues of $70 million last year and $30 million in interest expenses. About $ 300 million of Logan's $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. What is Logan Bank's gap ratio? Should Logan Bank be concerned about rising or falling interest rates?

Gap ratio = (Rate-sensitive assets/Rate sensitive liabilities) = ($300 million/$600 million) = 50% Logan Bank should be concerned about rising interest rates which would result in a reduction in its net interest margin

Profit from T-bond Futures. Egan Company purchased a futures contract on Treasury bonds that specified a price of 91-00. When this position was closed out, the price of the Treasury bond futures contract was 90-10. Determine the profit or loss, ignoring transaction costs.

Purchase price = $91,000 Selling price= $90,312 Profit = $90,312 - $91,000= -$688

Profit from T-bill Futures. Spratt Company purchased Treasury bill futures contracts when the quoted price was 93-50. When this position was closed out, the quoted price was 94-75. Determine the profit or loss per contract, ignoring transaction costs.

Purchase price = $935,000 Selling price = $947,500 Profit = $947,500 - $935,000 = $12,500

Profit from T-bill Futures. Suerth Investments Inc. purchased Treasury bill futures contracts when the quoted price was 95-00. When this position was closed out, the quoted price was 93-60. Determine the profit or loss per contract, ignoring transaction costs.

Purchase price = $950,000 Selling price = $936,000 Profit = $936,000 - $950,000= -$14,000

Taylor Bank has a return on assets of 2%, $40 million in assets, and $4 million in equity. What is the return on equity?

ROE = (Net profit after taxes)/Equity; ROE = ROA x leverage measure = [(Net income)/Equity] = [(Net income)/Total assets] x [Total assets/Equity] = [2% x ($40million/$4million)] = 20%

Jasmine buys an S&P 500 futures contract with a September settlement date when the index is 1,400. By the settlement date, the S&P 500 index rises to 1,750. The value of an S&P 500 futures contract is $250 times the index. The return on Jasmine's position in the S&P 500 futures contract is ______ percent.

Return = [(1750 -1400)/1400] = 25%

Profit from Stock Index Futures. Marks Insurance Company sold S&P 500 stock index futures that specified an index of 1690. When the position was closed out, the index specified by the futures contract was 1,720. The value of an S&P 500 futures contract is $250 times the index. Determine the profit or loss, ignoring transaction costs.

Selling price = $250 x 1,690 = $422,500 Purchase price = $250 x 1,720 = $430,000 Profit = $422,500 - $430,000 = -$7,500

Profit from T-bill Futures. Rude Dynamics Inc. sold Treasury bill futures contracts when the quoted price was 93-26. When this position was closed out, the quoted price was 93-90. Determine the profit or loss per contract, ignoring transaction costs.

Selling price = $932,600 Purchase price = $939,000 Profit $932,600 - $939,000 = -$6,400

Assume that a British pound put option has a premium of $.03 per unit and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date, if at all. What is the expected per unit net gain (or loss) resulting from purchasing the put option?

( exercise price - future spot rate) - premium paid for the option = ($1.60 - $1.52) - $.03 = $.05 gain

Caspian Bank has negotiated a plain vanilla swap in which it will exchange fixed payments of 8% for floating payments equal to LIBOR plus 0.5% at the end of each of the next three years. In the first year, LIBOR is 8%; in the second year, 9%; in the third year, 7%. What is the total net payment Caspian Bank receives, over the three-year period, if the notional principal is $10 million?

1. Year 1 = 8% [Caspian pays 8% and receives 8.5% of $10,000,000] or receives .5% X $10,000,000 = $50,000. 2. Year 2 = 9% [Caspian pays 8% and receives 9.5% of $10,000,000] or receives 1.5% X $10,000,000 = $150,000. 3. Year 3 = 7% [Caspian pays 8% and receives 7.5% of $10,000,000] or pays .5% X $10,000,000 = $50,000. Caspian's net payment received = ( +$50,000 + $150,000 - $50,000) = $150,000

Logan bank had interest revenues of $70 million last year and $30 million in interest expenses. About $ 300 million of Logan's $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. What is Logan Bank's net interest margin?

= [($70 million - $30 million)/$800 million] = 5%

Logan bank had interest revenues of $70 million last year and $30 million in interest expenses. About $ 300 million of Logan's $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. What is Logans gap?

Gap = Rate-sensitive assets - Rate-sensitive liabilities = ($300 million - $600 million) = - $300 million.

Thompson Bank has the following asset and liability portfolios. What is its gap? What is its gap ratio? Should Thompson Bank be concerned about rising interest rates or declining interest rates? Assets (in millions) - Floating rate loans: $4,000 - Floating rate mortgages: $1,000 Short term Treasury securities: 1,500 Total: $6,500 Liabilities (in millions) - NOW accounts: $1,750 - MMDAs: 4,500 - Short term CDs: 1,000 Total: $7,250

Gap = Rate-sensitive assets - Rate-sensitive liabilities = ($6,500million - $7,250million) = -$750million Gap ratio = (Rate-sensitive assets/Rate sensitive liabilities) = ($6,500million/$7,250million) = .897 Thompson Bank should be concerned about rising interest rates because rising interest rates will reduce the Bank's net interest margin

Assume the following information: - Interest rate on borrowed euros is 5 percent annualized - Interest rate on dollars loaned out is 6 percent annualized - Spot rate for €0.83 per dollar (one € = $1.20) - Expected spot rate in five days is €0.85 per dollar - Alonso Bank can borrow €10 million What is the euro profit to Alonso Bank over the five-day period from shorting euros and going long on dollars?

Step 1: Borrow €10 million and convert to U.S.$ at (one € = $1.20), = $12,000,000. Step 2: Invest the $12,000,000 at 6% annual rate for 5 days. (Assume a 360 day year convention to calculate daily rate to 4 decimal places.) 6%/360 = (.0167%/day) X 5 days = .0833%. Step 3: After 5 days invested at 6% annual rate, the $12,000,000 grows to: $12,000,000 X (1 + .000833) = $12,009,996 Step 4: Convert the $12,009,996 to € (euros) @ spot rate of €0.85/$, $12,009,996 X (€0.85/$) = €10,208,497 Step 5: Pay back the borrowed €10 million plus interest of 5% annual rate for 5 days. (5%/360 = .0139%/day X 5 days = .0694%. Hence, payback €10,000,000 (1 + .000694) = €10,006,940. Step 6: Calculate profit = [ €10,208,497 - €10,006,940] = €201,557

Orlando Bank entered into a three-year interest rate collar. (A collar involves purchasing an interest rate cap and, simultaneously, selling an interest rate floor.) The interest rate cap specifies a fee of 3% of notional principal valued at $50 million with an interest rate ceiling of 10%. The interest rate floor specifies a fee of 3% of notional principal valued at $50 million and an interest rate floor of 8%. The level of LIBOR over the next three years is: Year 1= 6% Year 2= 12% Year 3= 11% What is Orlando Bank's net profit (loss) from this strategy?

The fee paid by Orlando Bank to purchase the interest rate cap, (3% of $50 million = $1,500,000), is offset by the fee received by Orlando Bank for selling an interest rate floor, (3% of $50million =$1,500,000). In year 1, since LIBOR = 6% and is thus 2% below the interest rate floor of 8%, Orlando Bank pay's the buyer of the interest rate floor, (2% X $50,000,000) = $1,000,000. In year 2, since LIBOR = 12% and thus 2% above the interest rate ceiling of 10%, the seller of the interest rate cap pays Orlando Bank (2% X $50,000,000) = $1,000,000. In year 3, since LIBOR = 11% and thus 1% above the interest rate ceiling, the seller of the interest rate cap pays Orlando Bank (1% X $50,000,000) = $500,000. Hence, Orlando Bank's returns are: -$1,500,000 from purchasing the interest rate cap. +$1,500,000 from selling an interest rate floor. -$1,000,000 in year 1(interest paid to the buyer of the interest rate floor) +$1,000,000 in year 2 (interest received from the seller of the interest rate cap) +$500,000 in year 3 (interest received from the seller of the interest rate cap) $500,000 = Net Profit

Thornton National Bank purchases a three-year interest rate cap for a fee of 2% of notional principal valued at $50 million, with an interest rate ceiling of 10% and LIBOR as the index representing the market interest rate. Assume that LIBOR is expected to be 9%, 12% and 13% at the end of each of the next three years, respectively. The total net payments received by Thornton, including the initial fee, are $_____.

Thornton pays (2% X $50,000,000) = $1,000,000 fee up front for the cap. 1. Year 1 = 9%, Thornton receives nothing 2. Year 2 = 12% (Thornton receives 2% of $50,000,000) = $1,000,000 3. Year 3 = 13% (Thornton receives 3% of $50,000,000) = $1,500,000 Thornton's total net payments received = [ - $1,000,000 + $1,000,000 + $1,500,000] =$1,500,000

In The Wall Street Journal, you observe that the British pound (£) is quoted for $1.65. The Australian dollar (A$) is quoted for $0.60. What is the value of the Australian dollar in British pounds?

Value of 1 unit of Currency A in units of currency B = Value of Currency A in $/Value of currency B in $ ($0.60/$1.65) = £0.36

Assume interest rate parity exists. If the spot rate on the British pound is $2 and the 1 ‑ year British interest rate is 7 percent, and the 1‑year U.S. interest rate is 11 percent, what is the pound's forward discount or premium?

[(1.11)/(1.07)] - 1 = (1.0374 - 1) = (.0374 X 100%) = 3.74%

If the spot rate of the British pound is $2, and the 180 day forward rate is $2.05, what is the annualized premium or discount?

p= [(FR- S)/S] X (360/n) = [($2.05 - $2)/$2] X (360/180)= 5%