05988104 05917103 0013301 when this relationship is

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0.5988(1.04) - 0.5917(1.03) = 0.013301; when this relationship is positive; action a will result in arbitrage profits. Difficulty: Difficult 21. Assume the current market futures price is 1.66 A\$/\$. You borrow 167,000 A\$ and convert the proceeds to U.S. dollars and invest them in the U.S. at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A\$ at the current futures prices (maturity of 1 year). What would be your profit (loss)? A. Profit of 630 A\$ B. Loss of 2300 A\$ C. Profit of 2300 A\$ D. Loss of 630 A\$ E. None of the above [A\$ 167,000 / 1.67 x 1.04 x 1.66] - (A\$ 167,000 x 1.03) = A\$ 630. Difficulty: Difficult 23-9

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Chapter 23 - Futures, Swaps, and Risk Management 22. Which of the following are examples of interest rate futures contracts? Interest rate futures are traded on Treasury bonds and Eurodollars. Examples that use these contracts to hedge are given in the textbook. Difficulty: Easy 23. You hold a \$50 million portfolio of par value bonds with a coupon rate of 10 percent paid annually and 15 years to maturity. How many T-bond futures contracts do you need to hedge the portfolio against an unanticipated change in the interest rate of 0.18%? Assume the market interest rate is 10 percent and that T-bond futures contracts call for delivery of an 8 percent coupon, paid annually 20-year _______ maturity T-bond. 0.9864485 X \$50 M = \$49,322,429; \$50,000,000 - \$49,322,429 = \$677,571 loss on bonds; \$100.00 - \$82.97 = \$17.03 X 100 = \$1703 gain on futures; \$677,571/\$1,703 = 398 contracts short. Difficulty: Difficult 23-10
Chapter 23 - Futures, Swaps, and Risk Management 24. A swap A firm can enter into agreement to pay a floating rate and receive a fixed rate. Swaps involve an exchange of cash flows rather than securities. Difficulty: Easy 25. Credit risk in the swap market A. is extensive. B. is limited to the difference between the values of the fixed rate and floating rate obligations. C. is equal to the total value of the payments that the floating rate payer was obligated to make. D. A and C. E. none of the above. Swaps obligate two counterparties to exchange cash flows at one or more future dates. Swaps allow firms to restructure balance sheets, and the firm is obligated only for the difference between the fixed and floating rates. Difficulty: Easy 23-11

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Chapter 23 - Futures, Swaps, and Risk Management
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