Suppose that you buy an interest rate cap on three month LIBOR with a two year maturity and simultaneously sell a floor on three month LIBOR with a two year maturity. Ignore the premiums. Draw a profit diagram that indicates when you will gain and lose on the combined positions. Compare this with different basic interest rate swap and futures positions.
Answer to relevant QuestionsAre there margin requirements for the following positions? Explain why or why not. a. Buy an interest rate cap b. Sell a put option on Eurodollar futures c. Sell an interest rate floor d. Sell a Eurodollar futures ...In each of the following cases, conduct the analysis for Step 1 and Step 2 (page 339 in this chapter) in evaluating a hedge. Specifically assess cash market risk and determine whether the bank should buy or sell financial ...What are the different types of cash assets and the basic objectives for holding each? What can a bank do to increase its core deposits? What are the costs and benefits of such efforts? Generally, how might management estimate the relative interest elasticity of various deposit liabilities of a bank? The determination of cash requirements is closely associated with a bank’s liquidity requirements. Explain why.
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