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...

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%.)

Assume today is 4 May 2017 and you intend to invest in 90-day
Bank Accepted Bills (BAB) on 11 June 2017. You decide to take a
position in the BAB futures contract to hedge the interest rate
risk that you are likely to face between now and 11 June 2017. What
is the nature of the interest rate risk you are likely to face, and
how will you use the BAB futures contract to hedge that risk?
A.
A fall...

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...

In early March an insurance company portfolio manager has a
stock portfolio of $500 million with a portfolio beta of 1.20. The
portfolio manager plans on selling the stocks in the portfolio in
June to be able to pay out funds to policyholders for annuities,
and is worried about a fall in the stock market. In April, the CME
Group S&P 500 mini= Futures contract index is 2545 for a June
futures contract ($50 multiplier for this
contract).
a. What...

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...

Suppose Ms. Hunter anticipates a cash inflow of $9.875 million
in September that she plans to invest in ten $1 million face value
T-bills with a maturity of 91 days. Suppose there is a September
T-bill futures contract trading at a discount yield of 5%.
a) (1 mark) Describe the interest rate risk that she is facing.
Is it better if interest rates increase or decrease?
b) (1 mark) How could she lock in the purchase price on her
T-bills?...

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