{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Solution of Derivative

90 c the implied libor of the september eurodollar

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

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: We face the problem that the 90-day and 150-day interest rates may not be perfectly correlated. (For example, the term structure could, over the next 60 days, move from upward sloping to downward sloping). b) As we want to lend money, we want to buy protection against low interest rates, which means high Eurodollar future prices. We will therefore go long the Eurodollar contract. 100 − 94 = 1 .5 % . 400 Under the assumption that the 3-month LIBOR rate and the 150-day interest rate are based on the same annualized interest rate of 6%, we are able to lock in an interest rate of: 150 1 .5 % × = 2.5% . Please note that this is a rather strong assumption. 90 c) The implied LIBOR of the September Eurodollar futures of 94 is: d) One Eurodollar futures contract is based on a \$1 million 3-month deposit. As we want to hedge an investment of \$100M, we will enter into 100 long contracts. Again, we are making the strong assumption that the annualized 3-month LIBOR rate and the annualized 150 day rate are identical and perfectly correlated. 52 Chapter 7 Interest Rate Forwards and Futures Question 7.20. We will use the Excel functions Duration and Mduration to calculate the required durations: They are of the form: MDURATION(Start Date; Terminal Date; Coupon; Yield; frequency) DURATION(Start Date; Terminal Date; Coupon; Yield; frequency), where frequency determines the number of coupon payments per year. In order to use the function, we have to give Excel a start date and terminal date, but we can just pick two dates that are exactly the requested number of years apart. Plugging in the values of the exercises yields: a) Macaulay Duration = 4.59324084 Modified Duration = 4.3983078 b) Macaulay Duration = 5.99377496 Modified Duration = 5.73566981 c) We need to find the yield to maturity of this bond first. We can do so by using the YIELD function of Excel. Plugging in the relevant values, we get: Yield = 0.07146759. Now we can again use the Mduration and duration formulas. This yields: Macaulay Duration = 7.6955970 Modified Duration = 7.1822957 Question 7.22. We will exploit equation (7.13) of the main text to find the optimal hedge ratio: N =− D1 B1 ( y1 ) / (1 + y1 ) 6.631864 × 106.44 / (1.05004 ) 672.255918 = =− = −0.887707 D2 B2 ( y 2 ) / (1 + y 2 ) 7.098302 × 112.29 / (1.05252 ) 757.2951883 Therefore, we have to short 0.887707 units of the nine-year bond for every eight-year bond to obtain a duration-matched portfolio. 53 Chapter 8 Swaps Question 8.2. a) We first solve for the present value of the cost per three barrels, based on the forward prices: \$20 \$21 \$22 + + = 55.3413 2 1.06 (1.065) (1.07 )3 We then obtain the swap price per barrel by solving: ⇔ b) x x x + + 2 1.06 (1.065) (1.07 )3 x = 55.341 = 20.9519 We first solve for the present value of the cost per two barrels (year 2 and year 3): \$21 \$22 + = 36.473 2 (1.065) (1.07 )3 We then obtain the swap price per barrel by solving: ⇔ x x + = 36.473 2 (1.065) (1.07 )3 x = 21.481 Question 8.4. The fair swap rate was determined to be \$20.952. Therefore, compared to the forward curve price of \$20 in one year, we are overpaying \$0.952. In year two, this overpayment has increased to \$0.952 × 1.070024 = 1.01866 , where we used the appropriate forward rate to calculate the interest payment. In year two, we underpay by \$0.048, so that our total accumulative underpayment is \$0.97066. In year three, this overpayment has increased again to \$0.97066 × 1.08007 = 1.048 . However, in year three, we receive a fixed payment of 20.952, which underpays relative to the forward curve price of \$22 by \$22-\$20.952 = 1.048. Therefore, our cumulative balance is indeed zero, which was to be shown. 54 Chapter 8 Swaps Question 8.6. In order to answer this question, we use equation (8.13.) of the main text. We assumed that the interest rates and the corresponding zero-coupon bonds were: quarter 1 2 3 4 5 6 7 8 interest rate 0.015 0.03 0.045 0.06 0.075 0.09 0.105 0.12 zero-coupon price 0.9852 0.9709 0.9569 0.9434 0.9302 0.9174 0.9050 0.8929 Using formula 8.13., we obtain the following per barrel swap prices: 4-quarter swap price: 8-quarter swap price: \$20.8532 \$20.4275 The total costs of prepaid 4- and 8-quarter swaps are the present values of the payment obligations. They are: 4-quarter prepaid swap price: 8-quarter prepaid swap price: \$80.4190 \$153.2460 Question 8.8. We use formula (8.4), and replace the forward interest rate with the forward oil prices. In particular, we calculate: ∑ P (0, t )F X= ∑ P (0, t ) 6 i i =3 0 6 i =3 0 0 ,ti = \$20.3807 i Therefore, the swap price of a 4-quarter oil swap with the first settlement occurring in the third quarter is \$20.3807. 55 Part 2 Forwards, Futures, and Swaps Question 8.10. We use equation (8.6) of the main text to answer this question: ∑ Q P (0, t )F X= ∑ Q P (0, t ) 8 i =1 ti 8 i =1 i 0 ti 0 0 ,t i , where Q = [1,2,1,2,1,2,1,2] i After plugging in the relevant variables given in the exercise, we obtain a value of \$20.4099 for the swap price. Question 8.12. With a...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online