Question

In March, a bank short-term investment manager has $1 million in
90 day Tbills on its balance sheet that it plans to sell in June
for liquidity purposes, and is worried about interest rates rising
(i.e. prices falling) in the next few months, which would cause the
value of the T-bills to fall. The current (spot) discount yield is
1.10% (i.e. a Discount % price of 98.90%) for a 90-day
T-bill.

a. What is the price for the $ 1 million of T-bills in
dollars?

T-bill Price in Dollars
________

b. On the CME Group website, a June Eurodollar Futures contract gives a price of 98.10% (i.e., a discount yield of 1.90%) for a $1 million, 90 day Eurodollar Futures contract. b. What is the contract price for the Eurodollar Futures Contract in dollars?

Eurodollar Futures Price in Dollars ______________

What type of Eurodollar futures contract should be purchased (long or short)? Explain why.

Long or Short _______ Why?_______________________

c. Suppose in June the T-bill discount yield goes up by 20 basis
points to 1.30%, and the Eurodollar Futures yield goes up by 25
basis points to 2.15%, what is the new dollar price for the 1 mil.
T-bills, and what is the new contract dollar price for the
Eurodollar Futures Contract?

New T-bill Price in Dollars _______________

New Eurodollar Futures Price in Dollars ____________

Answer #1

3. . Mod. 5: Hedging with
Interest Rate Futures (Chapter 8, pp. 191 to 193).
[Hints: $ Price for
T-bills and Eurodollar Futures:
$ Price = $
Amount {1 – [(d x n)/360]}
where d = discount
yield as a fraction; n = maturity, usually 90 days]
In March, a
bank short-term investment manager has $1 million in 90 day T-bills
on its balance sheet that it plans to sell in June for
liquidity purposes, and is worried...

On the CME
Group website, a June Eurodollar Futures contract gives a price of
98.10% (i.e., a discount yield of 1.90%) for a $1 million,
90 day Eurodollar Futures contract.
What is the contract price for the Eurodollar Futures
Contract in dollars?
Eurodollar Futures Price in Dollars
______________
What type of
Eurodollar futures contract should be purchased (long or short)?
Explain why.
Long or
Short _______
Why?_______________________

First American Bank is planning to make a $20 million short-term
loan to Midwest Mining Company. In the loan contract, Midwest
agrees to pay the principal and an interest of 12 percent (annual)
at the end of 180 days. Since First American sells more 90-day CDs
(Certificates of Deposits) than 180-day CDs, it is planning to
finance the loan by selling a 90-day CD now at the prevailing LIBOR
of 8.25 percent (compounded annually), then 90 days later
(mid-September) sell...

1. The bank you are working for needs to borrow $100 million on
May 15 th by selling 90-day Eurodollar deposits. Your bank’s
Treasury desk is looking into derivatives contracts for hedging the
bank’s risk and is interested in the June Eurodollar futures
contract with a current price of 93.25 and a contract size of $1
million.
a. Explain the risk faced by your bank in the spot market and
determine the futures position that the Treasury desk should take...

First American Bank is planning to make a $20 million short-term
loan to Midwest Mining Company. In the loan contract, Midwest
agrees to pay the principal and an interest of 12 percent (annual)
at the end of 180 days. Since First American sells more 90-day CDs
(Certificates of Deposits) than 180-day CDs, it is planning to
finance the loan by selling a 90-day CD now at the prevailing LIBOR
of 8.25 percent (compounded annually), then 90 days later
(mid-September) sell...

Commonwealth Bank agrees to establish a 270-day bill facility
using 90-day bank bills. The face value of the facility is $10
million, and the issuer is charged an acceptance fee of 60 basis
points. Calculate the net cash flows from 1) the issuer’s and 2)
the bank’s perspective, respectively. Briefly explain what each of
the cash flows stands for. (The first parcel is issued at a market
yield of 4.80% p.a., the second at 4.65% and the third at
5.00%.)

Use the following information to answer Questions 8 to 10. A
company intends issuing 90-day bank bills with a face value of $1
million in two months’ time. The treasurer enters into a 2X5FRA on
a face value of $1 million at a contract rate of 5.5% to hedge the
interest rate risk. The bank bills are issued in two months’ time
on day the FRA is settled when the 90-day bank bill rate is
6.5%.
8. The settlement amount...

On 1 September 2020, Blair Ltd purchases for speculative
purposes a 90-day bank-accepted bill futures contract (2,500 Units)
at 87.50. The contract has a face value of $1 million. On that date
Blair makes an initial cash margin deposit of $30,000 with its
broker. Blair holds the contract until 1 December 2020 when it
closes out the contract. The quoted market price of the futures
contract increases during September (to 88.00) and October (to
88.20) and declines in November (to...

Question 2
A portfolio manager desires to generate $10 million
100 days from now from a portfolio that is quite similar in
composition to the S&P 100 index. She requests a quote on a
short position in a 100-day forward contract based on the index
with a notional amount of $I0 million and gets a quote of $25.2. If
the index level at the settlement date is $35.7, calculate the
amount the manager will pay or receive to settle the...

Questions
Treasury bills are the safest and the most liquid type of
short-term investment. The Treasury issues 13-week T-bills and
26-week T-bills on a regular basis in denominations of $1,000.
Dealers bid on the new issues, but smaller investors just accept
the average price. If the price of 13-week T-bills is shown to be
$99.2,
a) what will be the price be?
b) Now calculate the
yield.
Will the 26 week bills probably have a higher yield or a lower...

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