chapter 14 homework

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Interest rate swaps have an advantage over options and futures in​ that:

. They can be written for a long time horizon.

A swap agreement calls for Durbin Industries to pay interest​ annually, based on a rate of 2.002.00​% over the one year​ T-bill rate, currently 5.005.00​%. In​ return, Durbin receives interest at a rate of 5.005.00​% on a​ fixed-rate basis. The notional principal for the swap is $ 60 comma 000$60,000. What is​ Durbin's net interest payment for the year after the​ agreement?

1200

Futures contracts are regularly traded on the

Chicago Board of Trade.

At the expiration​ date, a deliverable Treasury bond is selling for 101 but the Treasury bond futures contract is selling for 102. The futures price​ will:

Fall to 101 due to arbitrage

Your company owes 10M EUR three months from now. How would you hedge the foreign exchange risk with​ 125,000 EUR futures​ contracts?

Go long 80 EUR futures contracts for three months.

You have a call option on a​ $100,000 Treasury bond futures contract with an exercise price of 110. The premium was​ $1,500 and at expiration the futures contract has a price of 111. What is your profit or loss if you exercise the​ option?

Loss: $500

A contract that requires the investor to buy securities on a future date is called a

long contract.

Interest forward contracts are used​ to:

hedge against interest rate risk.

A fund manager who specializes in corporate bonds believes that credit spreads are going to tighten and that interest rates are going to continue to decline. To protect the​ fund, he​ could:

Buy a call on a credit option.

​Mason-Dixon has made extensive loans in its corporate credit portfolio to a property developer. It is looking for some kind of insurance against a downgrade of the developer by the major ratings agency because the​ developer's major project is running into unforeseen delays. Mason Dixon offers to pay Midwest National Bank a premium every six months for the next five years in exchange for which Midwest agrees to make payments to​ Mason-Dixon of a​ pre-set amount should the developer be downgraded. This is an example of​ a:

Credit default swap.

You have bought a put option on a​ $100,000 Treasury bond futures contract with an exercise price of 95. The premium for the option was​ $4,000. The price of the Treasury bond at expiration is 120. You​ are:

Out of the money

Agreeing to deliver an asset at some future date is called taking a​ __________ position. Taking a​ _____________position can offset the risk.

Short, long

The portfolio you manage is holding​ $25M of 6s of 2023 Treasury bonds with a price of 110. You would like to hedge the interest rate risk using a forward contract on these for the next year. You could​ __________________

Take a short position for​ T-bonds at the same interest rate and maturity

A hedger takes a short position in 55 ​T-bill futures contracts at the price of 966/32. Each contract is for​ $100,000 principal. When the position is​ closed, the price is 99 7/32.

The hedger incurs a loss of ​$15,156.25

Consider a put contract on a​ T-bond with an exercise price of 101 ​12/32. The contract represents​ $100,000 of bond principal and had a premium of $ 700. The actual​ T-bond price falls to 98​16/32 at the expiration.

What is the gain or loss on the​ position? ​$2175

An option that can only be exercised at maturity is called​ ________.

an European option

A swap that involves the exchange of one set of interest payments for another set of interest payments is called​ ________.

an interest rate swap.

Parties who have bought a futures contract and thereby agreed to​ ________ (take delivery​ of) the bonds are said to have taken a​ ________ position.

buy; long

The credit derivative​ that, for a​ fee, gives the purchaser the right to receive profits that are tied either to the price of an underlying security or to an interest rate is called a

credit option

All other things held​ constant, premiums on call options will increase when the

exercise price falls.

If you bought a long contract on financial futures you hope that interest rates

fall.

Options on futures contracts are referred to as

futures options

A call option gives the seller the

obligation to sell the underlying security.

Forward contracts are of limited usefulness to financial institutions because

of default risk.

​If, for a​ $1000 premium, you buy a​ $100,000 call option on bond futures with a strike price of​ 110, and at the expiration date the price is​ 114, your​ ________ is​ ________.

profit; $3000

An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a

put option

If Second National Bank has more rateminus−sensitive assets than rateminus−sensitive ​liabilities, it can reduce interestminus−rate risk with a swap that requires Second National to

receive fixed rate while paying floating rate.

If you bought a long futures contract you hope that bond prices

rise

A short contract requires that the investor

sell securities in the future.

The price specified on an option at which the holder can buy or sell the underlying asset is called the

strike price

An advantageAn advantage of using forward contracts to hedge is

that you can completely hedge the interest minus rate risk for a securitythat you can completely hedge the interest−rate risk for a security.

A macromacro hedge is a hedge in which

the hedge is for the institution's entire portfoliothe hedge is for the institution's entire portfolio.

The most common type of interestminus−rate swap is

the plain vanilla swap

An advantage to using​ interest-rate swaps is that

they allow institutions to convert fixed minus rate assets into rate minus sensitive assets without affecting the balance sheetthey allow institutions to convert fixed−rate assets into rate−sensitive assets without affecting the balance sheet.

Futures contracts have an advantage over forward contracts in that

they are not subject to default risk and are more liquid.

By taking the long position on a futures contract of​ $100,000 at a price of 115 you are agreeing to​ ________ a​ ________ face value security for​ ________.

​buy; $100,000;​ $115,000.

If you buy a call option on Treasury futures at​ 115, and at expiration the market price is​ 110, the​ ________ will​ ________ exercised.

​call; not be

If you sell a​ $100,000 interestminus−rate futures contract for​ 105, and the price of the Treasury securities on the expiration date is​ 108, your​ ________ is​ ________.

​loss; $3000

The seller of an option has the​ ________ to buy or sell the underlying asset while the purchaser of an option has the​ ________ to buy or sell the asset.

​obligation; right


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