derivatives and foreign exchange markets $20 no negotiations

Project Description:

suppose you are a manager of a financial institution. you recently purchased a three-year interest rate collar with libor as the interest rate index. the interest rate cap specifies a fee of 2 percent of $60 million notional principal and an interest rate ceiling of 9 percent. the interest rate floor specifies a fee of 3 percent of the $60 million notional principal and an interest rate floor of 7 percent. assume that libor is expected to be 6 percent, 10 percent, and 12 percent (respectively) at the end of each of the next three years.

a. if you are certain that interest rates will rise, should you consider purchasing a callable swap instead of the collar? explain.

b. explain the conditions under which your purchase of an interest rate collar could have unintended consequences.

as a portfolio manager of a us-based financial institution, you are responsible for managing domestic and international investments of your institution. approximately 25 percent of the stock portfolio you manage is british stocks. your expectation is that the british stock market will perform well over the next year. therefore, you plan to sell the stocks one year from now and then convert the british pounds received to dollars at that time. however, you are worried that the british pound may depreciate against the dollar over the next year.

a. explain how you could use a forward contract to hedge the exchange rate risk associated with your position in british stocks.

b. if interest rate parity holds, does this limit the effectiveness of a forward contract as a hedge?

c. explain how you could use an options contract to hedge the exchange rate risk associated with your position in stocks.

d. assume that, although you are worried about the potential decline in the pound’s value, you also believe that the pound could appreciate against the dollar over the next year. you would like to benefit from the potential appreciation but also wish to hedge against the possible depreciation. should you or should you not use forward contract or options contracts to hedge your position? explain.


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Price Type: Fixed

Project Budget: $10 to $20
Completed
Total Proposals: 4
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