Review 6

# Review 6 - BANK 1005(11941 Derivatives and Securities...

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BANK 1005(11941) Derivatives and Securities Markets Page 2 of 8 Review 6 (Topic 6 – Derivatives Markets) 2. Assume that there is available a 180-day bank bill futures contract with a face value of \$500,000. The contract settling in six months is currently trading at a price of 96.00. Show that its PVBP is \$23.71. A \$100 million inflow is expected in six months’ time and it will be invested in the 180-day bill market. How can we hedge this investment? What are the problems? How can we use this contract to create a synthetic 360-day bill? The yield on the futures contract is: 100 – 96.00 = 4.00 In order to calculate the PVBP at 4.00% p.a., we need to calculate the price of a bill with face value \$500,000 at 4.00% and 4.01% p.a. 4.00 P = \$490327.78 4.01 P = \$490304.07 PVBP = \$23.71 The PVBP for the exposure is: 51 . 4931 \$ 365 180 0001 . 0 m 100 \$ = × × We buy contracts. The number is: contracts 208 71 . 23 51 . 4931 = The problems are: we miss out on the benefit of any interest rate increase; we may need to meet margin calls; and there is a minor rounding problem in that the number of contracts is rounded to the nearest whole number. This is likely to be minor compared with the exposure of \$100m. The equivalent of a 360-day bill can be created by:
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Review 6 - BANK 1005(11941 Derivatives and Securities...

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