Question 1

22-108 What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

Accepted Answer

The answer of 22-108 What is the change in the...

Question 2

22-117 Assume that the hedge was placed at the rates in question 114,and that the BP futures contract is trading at $1.62/£.Assume the futures contract has some days remaining to maturity.What will be the gain or loss on the hedge if it is unwound at this price?

Accepted Answer

The answer of 22-117 Assume that the hedge was placed...

Question 3

22-112 What is the gain or loss on the futures position using T-Bonds if the shock to interest rates is 0.01,i.e.$\Delta$R/(1+R)= .01 $\implies$$\Delta$Rf/(1+Rf)= .01?

Accepted Answer

The answer of 22-112 What is the gain or loss...

Question 4

22-119 What should be the trading price of the BP futures contract at the end of the year in order for the FI to be perfectly hedged? That is,the FI earns its original anticipated spread without any effects of exchange rate changes?

Accepted Answer

The correct answer is B because the FI earns its original anticipated spread without any effects of exchange rate changes.

Question 5

22-123 If you wanted to hedge your bank's risk exposure,what hedge position would you take?

Accepted Answer

The best hedge position to take for a bank's risk exposure would be to use a short interest rate hedge to protect against interest rate increases and a short currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S. dollar. This is because if interest rates increase, it could lead to higher borrowing costs for the bank and if the value of the Canadian dollar decreases, it could lead to losses on foreign currency denominated assets. Therefore, taking a short position in both interest rates and currency would help to mitigate these risks.

Question 6

22-125 What is the end-of-year profit or loss on the bank's cash position if in one year the exchange rate falls to US$0.765/C$1? Assume there is no change in interest rates.

Accepted Answer

To calculate the end-of-year profit or loss, we need to convert the Canadian dollar balance to US dollars using the exchange rate at the end of the year:

C$1,000,000 x 0.765 = US$765,000

Since the beginning balance was US$770,000, the profit or loss is:

US$765,000 - US$770,000 = US$5,000 loss

Question 7

22-111 How would your results to question 109 change if basis risk shows that for every 1 percent shock to interest rates,i.e.,$\Delta$R = 0.01 and 1+R =1.10,the implied rate on the deliverable bonds in the futures market increases by 1.1 percent,i.e.,$\Delta$Rf/(1+Rf)= .011?

Accepted Answer

The correct answer is B because the implied rate on the deliverable bonds in the futures market increases by 1.1 percent, which means that the futures price will decrease by 1.1 percent. This will result in a loss of $1,888 on the futures contract.

Question 8

22-110 Based on the estimate of gain or loss in question 108,what is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

Accepted Answer

The answer of 22-110 Based on the estimate of gain...

Question 9

22-114 If at the end of the year,the exchange rate is $1.65/£,what is the spread earned on the loan by the FI in dollars after adjusting fully for exchange rates?

Accepted Answer

To calculate the spread earned on the loan, we need to subtract the cost of funding in pounds from the interest received in pounds, convert it to dollars at the spot rate ($1.50/£), then adjust for the year-end exchange rate ($1.65/£).

The interest received in pounds is £100,000,000 x 10% = £10,000,000. The cost of funding in pounds is £90,000,000 x 8% = £7,200,000. The spread earned in pounds is £10,000,000 - £7,200,000 = £2,800,000.

Converting the spread to dollars at the spot rate, we get:

£2,800,000 / $1.50/£ = $4,200,000

Adjusting for the year-end exchange rate, we get:

$4,200,000 x $1.65/£ = $6,930,000

So the spread earned on the loan by the FI in dollars after adjusting fully for exchange rates is $6,930,000 - $3,180,000 = $3,750,000. Therefore, the correct answer is A) -$3,750,000.

Question 10

22-116 What is the cash spread earned by the FI if at the end of the year the £ is trading at $1.63/£ in the cash market? Again adjust for all exchange rate changes.

Accepted Answer

The answer of 22-116 What is the cash spread earned...

Question 11

22-126 What is the end-of-year profit or loss on the bank's cash position if in one year Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S.interest rates or current exchange rates.

Accepted Answer

The answer of 22-126 What is the end-of-year profit or...

Question 12

22-109 Based on the estimate of gain or loss in question 108,what is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value?

Accepted Answer

The answer of 22-109 Based on the estimate of gain...

Question 13

22-118 What is the net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/£ in the cash market and 1.62/£ in the futures market? Assume that the futures position is opened and unwound as stated in questions 114 and 116.

Accepted Answer

The answer of 22-118 What is the net gain or...

Question 14

22-120 What type of currency hedge is necessary to protect the FI from exchange rate risk?

Accepted Answer

The answer of 22-120 What type of currency hedge is...

Question 15

22-124 If in one year there is no change in either interest rates or exchange rates,what is the end-of-year profit or loss of your bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

Accepted Answer

The answer of 22-124 If in one year there is...

Question 16

22-113 If the exchange rate remains the same,what is the dollar spread earned by the bank at the end of the year?

Accepted Answer

The answer of 22-113 If the exchange rate remains the...

Question 17

22-127 What is the end-of-year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to US$0.765 per Canadian dollar (Assume no change in U.S.interest rates.)

Accepted Answer

The answer of 22-127 What is the end-of-year profit or...

Question 18

22-122 Your position is exposed to:

Accepted Answer

The answer of 22-122 Your position is exposed to:
...

Question 19

22-121 How many currency contracts are necessary to hedge this asset?

Accepted Answer

The answer of 22-121 How many currency contracts are necessary...

Question 20

22-115 If the current (spot)rate for one-year British pound futures is currently at $1.58/£ and each contract size is £62,500,how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).

Accepted Answer

The answer of 22-115 If the current (spot)rate for one-year...

Quiz 22: Futures and Forwards

22-108 What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

22-117 Assume that the hedge was placed at the rates in question 114,and that the BP futures contract is trading at $1.62/£.Assume the futures contract has some days remaining to maturity.What will be the gain or loss on the hedge if it is unwound at this price?

22-112 What is the gain or loss on the futures position using T-Bonds if the shock to interest rates is 0.01,i.e. $\Delta$ R/(1+R) = .01 $\implies$ $\Delta$ Rf/(1+Rf) = .01?

22-119 What should be the trading price of the BP futures contract at the end of the year in order for the FI to be perfectly hedged? That is,the FI earns its original anticipated spread without any effects of exchange rate changes?

22-123 If you wanted to hedge your bank's risk exposure,what hedge position would you take?

22-125 What is the end-of-year profit or loss on the bank's cash position if in one year the exchange rate falls to US$0.765/C$1? Assume there is no change in interest rates.

22-111 How would your results to question 109 change if basis risk shows that for every 1 percent shock to interest rates,i.e., $\Delta$ R = 0.01 and 1+R =1.10,the implied rate on the deliverable bonds in the futures market increases by 1.1 percent,i.e., $\Delta$ Rf/(1+Rf) = .011?

22-110 Based on the estimate of gain or loss in question 108,what is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

22-114 If at the end of the year,the exchange rate is $1.65/£,what is the spread earned on the loan by the FI in dollars after adjusting fully for exchange rates?

22-116 What is the cash spread earned by the FI if at the end of the year the £ is trading at $1.63/£ in the cash market? Again adjust for all exchange rate changes.

22-126 What is the end-of-year profit or loss on the bank's cash position if in one year Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S.interest rates or current exchange rates.

22-109 Based on the estimate of gain or loss in question 108,what is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value?

22-118 What is the net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/£ in the cash market and 1.62/£ in the futures market? Assume that the futures position is opened and unwound as stated in questions 114 and 116.

22-120 What type of currency hedge is necessary to protect the FI from exchange rate risk?

22-124 If in one year there is no change in either interest rates or exchange rates,what is the end-of-year profit or loss of your bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

22-113 If the exchange rate remains the same,what is the dollar spread earned by the bank at the end of the year?

22-127 What is the end-of-year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to US$0.765 per Canadian dollar (Assume no change in U.S.interest rates.)

22-122 Your position is exposed to:

22-121 How many currency contracts are necessary to hedge this asset?

22-115 If the current (spot) rate for one-year British pound futures is currently at $1.58/£ and each contract size is £62,500,how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk) .

Quiz 22: Futures and Forwards

22-108 What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

22-117 Assume that the hedge was placed at the rates in question 114,and that the BP futures contract is trading at $1.62/£.Assume the futures contract has some days remaining to maturity.What will be the gain or loss on the hedge if it is unwound at this price?

22-112 What is the gain or loss on the futures position using T-Bonds if the shock to interest rates is 0.01,i.e. Δ\DeltaΔ R/(1+R) = .01 ⟹ \implies⟹Δ\DeltaΔ Rf/(1+Rf) = .01?

22-119 What should be the trading price of the BP futures contract at the end of the year in order for the FI to be perfectly hedged? That is,the FI earns its original anticipated spread without any effects of exchange rate changes?

22-123 If you wanted to hedge your bank's risk exposure,what hedge position would you take?

22-125 What is the end-of-year profit or loss on the bank's cash position if in one year the exchange rate falls to US$0.765/C$1? Assume there is no change in interest rates.

22-111 How would your results to question 109 change if basis risk shows that for every 1 percent shock to interest rates,i.e., Δ\DeltaΔ R = 0.01 and 1+R =1.10,the implied rate on the deliverable bonds in the futures market increases by 1.1 percent,i.e., Δ\DeltaΔ Rf/(1+Rf) = .011?

22-110 Based on the estimate of gain or loss in question 108,what is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

22-114 If at the end of the year,the exchange rate is $1.65/£,what is the spread earned on the loan by the FI in dollars after adjusting fully for exchange rates?

22-116 What is the cash spread earned by the FI if at the end of the year the £ is trading at $1.63/£ in the cash market? Again adjust for all exchange rate changes.

22-126 What is the end-of-year profit or loss on the bank's cash position if in one year Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S.interest rates or current exchange rates.

22-109 Based on the estimate of gain or loss in question 108,what is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value?

22-118 What is the net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/£ in the cash market and 1.62/£ in the futures market? Assume that the futures position is opened and unwound as stated in questions 114 and 116.

22-120 What type of currency hedge is necessary to protect the FI from exchange rate risk?

22-124 If in one year there is no change in either interest rates or exchange rates,what is the end-of-year profit or loss of your bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

22-113 If the exchange rate remains the same,what is the dollar spread earned by the bank at the end of the year?

22-127 What is the end-of-year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to US$0.765 per Canadian dollar (Assume no change in U.S.interest rates.)

22-122 Your position is exposed to:

22-121 How many currency contracts are necessary to hedge this asset?

22-115 If the current (spot) rate for one-year British pound futures is currently at $1.58/£ and each contract size is £62,500,how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk) .

22-112 What is the gain or loss on the futures position using T-Bonds if the shock to interest rates is 0.01,i.e. $\Delta$ R/(1+R) = .01 $\implies$ $\Delta$ Rf/(1+Rf) = .01?

22-111 How would your results to question 109 change if basis risk shows that for every 1 percent shock to interest rates,i.e., $\Delta$ R = 0.01 and 1+R =1.10,the implied rate on the deliverable bonds in the futures market increases by 1.1 percent,i.e., $\Delta$ Rf/(1+Rf) = .011?