FIN417- Old Exam 2

# FIN417- Old Exam 2 - CIRCLE YOUR CHOICE OF THE CORRECT...

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CIRCLE YOUR CHOICE OF THE CORRECT ANSWERS OR FILL IN THE BLANK WITH YOUR RESPONSE. 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%. Assume 1 tick = \$25. What rate did Amy lock in? Prove that the hedge did or did not work. (6 points) See Lecture 8, slides 39-44 She locked in 6.49% She lost 94 ticks * \$25 * 100 contracts = -\$235,000 -\$235,000+\$1,857,500 = 1,622,500 2. 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 and solved in class. See FRA question.doc See Lecture 10, slides 8-11 Term Interest Rate 30 day 5.10% 90 day 5.25% 180 day 5.70% 360 day 5.95% a) This FRA: (1 point) a) Settles in 6 months time ** b) Settles in 12 months time c) Settles in 18 months time d) None of the above b) What would be the contract rate on the FRA? (2 points) 0603 . 0 180 360 1 360 180 0570 . 0 1 360 360 0595 . 0 1 = - + + = FRA 500 , 857 , 1 \$ 12 3 * % 43 . 7 * 000 , 000 , 100 \$ = % 49 . 6 3 12 * 000 , 000 , 100 \$ 500 , 622 , 1 \$ =

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c) Assuming a notional principal of \$10 million and a spot 180 day Libor of 6%, at settlement, the payoff on the FRA is (be sure to identify who pays and who receives): (3 points) 31 . 456 , 1 \$ 000 , 000 , 10 * 000146 . 0 000146 . 0 360 180 06 . 0 1 360 180 ) 0603 . 0 0600 . 0 ( = = + - = Payoff Since the treasurer is short, this is a payment from the dealer 3. 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 the FRA I bought 1 month ago, i.e., how much was the gain or loss? (4 points) Variation of FRA question discussed and solved in class. See Lecture 10, slides 13-15
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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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FIN417- Old Exam 2 - CIRCLE YOUR CHOICE OF THE CORRECT...

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