7Lecture8interestrateriskIV

Payoffs margin tuesday close futures to 149 marked to

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: s Over the Counter Negotiated Hedging (95%) Very speculative (95%) Daily marked to market Reset at the new price No Clearing House No Margin Requirement No 47 Daily settlements Action Today Morning Sell Wed Futures at $150 Monday Close Futures ↑ to 155 Marked to Market ……………. Payoffs Margin Tuesday Close Futures to 149 Marked to market Reset at…. Wed Close Futures ↑ to 160 Marked to Market Reset at … 48 Hedger or Speculator Hedger Settlement at maturity Net price = Speculator Get out any time Rule : Make Profit if Price drops ~ Short Position Make Profit if Price increase ~ Long Position 49 Example-Bank (mln) Assets 100 Liabilities Equity 90 10 Duration of Assets = 5 yrs, Duration of Liabilities= 3 yrs Current rate = 10%, Δ Equity if Expect the interest rates to increase by 1%? ΔE = - [DA - DL * (L/A)] *A *Δr/(1+r) 50 Case 1 No Basis Risk No basis risk? Δr in Futures = Δr in Spot Futures position? Make “$” if Rates go up Now : Short Futures Contracts and Maturity : Buy Ba...
View Full Document

This note was uploaded on 03/12/2014 for the course FINE 442 at McGill.

Ask a homework question - tutors are online