FIN 417- Exam #2 Solutions

FIN 417- Exam #2 Solutions - 1 Amy is using 100 90-day...

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1. Amy is using 100 90-day Eurodollar futures contracts with a notional principal of \$1,000,000 each to hedge an investment of \$100,000,000. She bought the contracts at 93.51. However, when she closed the contracts, Libor was at 7.43%. What rate did Amy lock in? Prove that the hedge did or did not work assuming each tick is worth \$25. (4 points) Discussed in class, see slide 44, 8.ppt She locked in 6.49% She lost 94 ticks * \$25 * 100 contracts = \$235,000 100,000,000*0.743*3/12=\$1,857,500 (1,857,500-235,000)/100,000,000*12/3= 0.0649 A corporate treasurer wishes to hedge against a decrease in future lending costs due to a possible fall in short-term interest rates. She proposes to hedge against this risk by entering into a 6x12 FRA. The current term structure for LIBOR is as follows: Variation of FRA question discussed in class. Term Interest Rate 30 day 5.10% 90 day 5.25% 180 day 5.70% 360 day 5.95% 2. This FRA settles in 6 months time: (1 point) 3. What would be the rate on the FRA? (2 points) 0603 . 0 180 360 1 360 180 0570 . 0 1 360 360 0595 . 0 1 = ÷ - ÷ + ÷ + = ΦΡΑ

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4. Suppose that at 10 am in the morning, I buy a 3x6 FRA with a contract interest rate of 6.52% and a notional principal of \$100,000,000. Suppose further that in the current quarter there are 92 days and that in the next quarter there are 91 days. That is, the deferral period has 92 days and the contract period has 91 days. The spot Libor at 10 am is 6.3%. Now, suppose that 1 month later when there are 62 days remaining in the quarter that, the Fed surprises everybody (including me) by raising the target federal funds rate by 50 basis points (bps). As a result, Libor reacts immediately with the spot 2-month Libor increasing to 6.7%, the 3-month forward 3-month Libor becomes 6.92%. What does this do to the value of FRA I bought 1 month ago, i.e., how much was the gain or loss? (4 points) Variation of FRA question on slide 14 10.ppt discussed and solved in class. \$________________ + = + + 360 153 06878 . 0 1 360 91 0692 . 0 1 360 62 067 . 0 1 43 . 239 , 98 \$ 360 153 06878 . 0 1 360 91 * ) 0652 . 0 0692 . 0 ( * 000 , 000 , 100 = + - 5. Suppose that you are the treasurer of IBM with an extra US\$1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 3.62% and have a maturity of 26 weeks. The spot exchange rate is \$1.00 = ¥100, and the six month forward rate is \$1.00 = ¥110. What must the interest rate in Japan (on an investment of comparable risk) be before you are willing to consider investing there for six months? (2 points) Test Bank note: interest rate is annualized. ____________________% \$1,000,000 × (1.0181) = \$1,000,000 ×
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This note was uploaded on 11/15/2011 for the course FIN 417 taught by Professor Griffith during the Fall '11 term at Miami University.

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FIN 417- Exam #2 Solutions - 1 Amy is using 100 90-day...

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