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Risk Management Solutions 1

Risk Management Solutions 1 - have a yield of 3.80(a spread...

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Old Exam Questions - Risk Management - Solutions Page 1 of 4 Pages Risk Management - Solutions 1. Ideally, hedging transactions are: * A. Zero-NPV transactions B. Positive NPV transactions C. Negative NPV transactions D. None of the above 2. Derivatives can be used either to hedge or to speculate. These actions: * 3. An exporter in the USA is expecting a payment of BP 5 million in three months. He is planning to hedge the position using options. He should: * 4. Assume that in May you know that you will have $1,000,000 in August to invest in 90- day T-bills. Currently, 90-day cash T-bills have a yield of 4.00%, 120-day cash T-bills
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Unformatted text preview: have a yield of 3.80% (a spread of -20 basis points), and the September 90-day T-bill futures contract has a yield of 3.30%. You decide to hedge by purchasing the September futures contract, knowing that you will take off the hedge in August and purchase 90-day cash T-bills. Assume now that in August the spread between 3-month and 4-month T-bills changes to +15 basis points, such that 90-day cash T-bills have a yield of 2.90% and 120-day cash T-bills (as well as the September futures contract) have a yield of 3.05%. What will be your effective yield from this hedge? A. 3.30% * B. 3.15% C. 2.90% D. 3.05% E. 3.45% Cash 90-day T-bills = 2.90% Cash 120-day T-bills = 3.05% September contract = 3.05% Futures Value at Sale (3.05%) $992,375 Value at Purchase (3.30%) 991,750...
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