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Financial Institutions Management A Risk Management Approach 6th Edition Anthony Saunders, Marcia Cornett - Solutions
1. Assume swap pricing that allocates all gains from the swap to FI A. If FI A buys the swap from FI B and pays the swap intermediary’s fee, what are the realized net cash flows if LIBOR is 8.25 percent?
1. If FI A buys the swap in part (e) from FI B and pays the swap intermediary’s fee, what are the realized net cash flows if LIBOR is 11 percent? Be sure to net swap payments against cash market payments for both FIs.
1. If all barriers to entry and pricing inefficiencies between FI A’s debt markets and FI B’s debt markets were eliminated, how would that affect the swap transaction?
1. A Swiss bank issues a $100 million, three-year Eurodollar CD at a fixed annual rate of 7 percent. The proceeds of the CD are lent to a Swiss company for three years at a fixed rate of 9 percent. The spot exchange rate is Sf1.50/$.Is this expected to be a profitable transaction?
1. What are the cash flows if exchange rates are unchanged over the next three years?
1. What is the risk exposure of the bank’s underlying cash position?
1. How can the Swiss bank reduce that risk exposure?
1. If the U.S. dollar is expected to appreciate against the Sf to Sf1.65/$, Sf1.815/$, and Sf2.00/$ over the next three years, respectively, what will be the cash flows on this transaction?
1. If the Swiss bank swaps US$ payments for Sf payments at the current spot exchange rate, what are the cash flows on the swap? What are the cash flows on the entire hedged position? Assume that the U.S. dollar appreciates at the rates in part (e).What are the cash flows on the swap and the hedged
1. What would be the bank’s risk exposure if the fixed-rate Swiss loan was financed with a floating-rate U.S. $100 million, three-year Eurodollar CD?
1. What type(s) of hedge is appropriate if the Swiss bank in part (h) wants to reduce its risk exposure?
1. If the annual Eurodollar CD rate is set at LIBOR and LIBOR at the end of years 1, 2, and 3 is expected to be 7 percent, 8 percent, and 9 percent, respectively, what will be the cash flows on the bank’s unhedged cash position?Assume no change in exchange rates.What are the cash flows on the
1. What are both the swap and the total hedged position cash flows if the bank swaps out its floating rate US$ CD payments in exchange for 7.75 percent fixed-rate Sf payments at the current spot exchange rate of Sf1.50/$?
1. If forecasted annual interest rates are 7 percent, 10.14 percent and 10.83 percent over the next three years, respectively, and exchange rates over the next years are those in part (k), calculate the cash flows on an 8.75 percent fixed–floating-rate swap of U.S. dollars to Swiss francs at
1. What is the bank’s current net interest income? If Treasury bill rates increase 150 basis points, what will be the change in the bank’s net interest income?What is the bank’s repricing or funding gap? Use the repricing model to calculate the change in the bank’s net interest income if
1. How can swaps be used as an interest rate hedge in this example?
1. Go to the Office of the Comptroller of the Currency Web site at www.occ. treas.gov . Find the most recent levels of futures, forwards, options, swaps, and credit derivatives using the following steps. Click on “Publications.” From there click on “Qrtrly. Derivative Fact Sheet.” Click on
1. Use the following information to construct a swap of asset cash flows for the bank in problem 14. The bank is a price taker in both the fixed-rate market at 9 percent and the rate-sensitive market at the T-bill rate plus 1.5 percent. A securities dealer has a large portfolio of rate sensitive
1. What guidelines have regulators given to banks for trading in futures and forwards?
1. What is the primary goal of regulators in regard to the use of futures by FIs?
1. What is the interest rate risk exposure to the securities dealer?
1. How can the bank and the securities dealer use a swap to hedge their respective interest rate risk exposures?
1. What are the total potential gains to the swap?
1. Consider the following two-year swap of asset cash flows: An annual fixedrate asset cash flow of 8.6 percent in exchange for a floating-rate asset cash flow of T-bill plus 125 basis points. The swap intermediary fee is 5 basis points. How are the swap gains apportioned between the bank and the
1. What is a credit forward? How is it structured?
1. If the Sf futures price falls from $0.6579/Sf to $0.6349/Sf, what will be the impact on the FI’s futures position?
1. What are the realized cash flows if T-bill rates at the end of the first year are 7.75 percent and at the end of the second year 5.5 percent? Assume that the notional value is $107.14 million.
1. What is the number of futures contracts necessary to fully hedge the currency risk exposure of the FI? The contract size is Sf125,000 per contract.
1. What are the sources of the swap gains to trade?
1. If the Sf spot rate changes from $0.6667/Sf to $0.6897/Sf, how will this impact the FI’s currency exposure? Assume no hedging.
1. What are the implications for the efficiency of cash markets?
1. Is the FI exposed to dollar appreciation or depreciation relative to the Sf?
1. A U.S. FI has assets denominated in Swiss francs (Sf) of 75 million and liabilities of 125 million. The spot rate is $0.6667/Sf, and one-year futures are available for $0.6579/Sf.What is the FI’s net exposure?
1. A six-month Sf futures contract is available for $0.61/Sf. What net amount would be needed to fund the loan at the end of six months if the FI had hedged using the Sf10 million futures contract? Assume that futures prices are equal to spot prices at the time of payment (i.e., at maturity).
1. If it decides to hedge using Sf futures, should the FI buy or sell Sf futures?
1. Consider the following currency swap of coupon interest on the following assets:5 percent (annual coupon) fixed-rate U.S. $1 million bond 5 percent (annual coupon) fixed-rate bond denominated in Swiss francs (Sf)Spot exchange rate: Sf1.5/$.
1. If the spot rate six months from today is $0.64/Sf, what amount of dollars is needed if the loan is taken down and the FI is unhedged?
1. Show exactly how the FI is hedged if it repatriates its principal of Sf100 million at year end, the spot price of Sf at year end is $0.55/Sf, and the forward price is $0.5443/Sf.An FI has made a loan commitment of Sf10 million that is likely to be taken down in six months. The current spot rate
1. How many futures contracts should it buy or sell if a regression of past changes in spot prices on changes in future prices generates an estimated slope of 1.4?
1. Should it buy or sell futures to hedge against exchange rate risk exposure?
1. Should the FI be worried about the Sf appreciating or depreciating?
1. An FI is planning to hedge its one-year, 100 million Swiss francs (Sf)–denominated loan against exchange rate risk. The current spot rate is $0.60/Sf.A 1-year Sf futures contract is currently trading at $0.58/Sf. Sf futures are sold in standardized units of Sf125,000.
1. Using the information in parts (e) and (f), what can you conclude about basis risk?
1. If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact on the FI’s futures position?
1. What is the face value of the Sf bond if the investments are equivalent at spot rates?
1. If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI’s cash position?
1. How can the FI use futures or forward contracts to hedge its FX rate risk?If a futures contract is currently trading at $1.55/£, what is the number of futures contracts that must be utilized to fully hedge the FI’s currency risk exposure? Assume the contract size on the British pound futures
1. What are the realized cash flows, assuming no change in spot exchange rates? What are the net cash flows on the swap?
1. Is the FI exposed to a dollar appreciation or depreciation?
1. What are the cash flows if the spot exchange rate falls to Sf0.50/$? What are the net cash flows on the swap?
1. What is the FI’s net FX exposure?
1. What are the cash flows if the spot exchange rate rises to Sf2.25/$? What are the net cash flows on the swap?
1. An FI has assets denominated in British pounds of $125 million and pound liabilities of $100 million.
1. Describe the underlying cash position that would prompt the FI to hedge by swapping dollars for Swiss francs.
1. Consider the following fixed–floating-rate currency swap of assets: 5 percent(annual coupon) fixed-rate U.S. $1 million bond and floating-rate Sf1.5 million bond set at LIBOR annually. Currently LIBOR is 4 percent. The face value of the swap is Sf1.5 million. The spot exchange rate is Sf1.5/$.
1. What does the hedge ratio measure? Under what conditions is this ratio valuable in determining the number of futures contracts necessary to hedge fully an investment in another currency? How is the hedge ratio related to basis risk?
1. If there is perfect correlation between changes in the spot and futures contracts, how should the FI determine the number of contracts necessary to hedge the investment fully?
1. To fully hedge the investment, should the FI buy or sell euro futures contracts?
1. Is the dollar appreciating or depreciating against the euro?
1. An FI has an asset investment in euros. The FI expects the exchange rate of$/; to increase by the maturity of the asset.
1. What are the realized cash flows assuming no change in the spot exchange rate? What are the realized cash flows on the swap at the spot exchange rate?
1. What is the loss or gain if the price at reversal is 98.40?
1. what is the net profit?
1. Suppose an FI purchases a $1 million 91-day (360-day year) Eurodollar futures contract trading at 98.50.If the contract is reversed two days later by purchasing the contract at 98.60,
1. Assume that an FI has assets of $250 million and liabilities of $200 million. The duration of the assets is six years, and the duration of the liabilities is three years. The price of the futures contract is $115,000, and its duration is 5.5 years.What number of futures contracts is needed to
1. If the 1-year forward rate is Sf1.538 per US$, what are the realized net cash flows on the swap? Assume LIBOR is unchanged.
1. An FI is planning to hedge its $100 million bond instruments with a cross hedge using Eurodollar interest rate futures. How would the FI estimate br R R R R f f [ /( ) / /( ) ] 1 1 to determine the exact number of Eurodollar futures contracts to hedge?
1. Explain what is meant by br 0.90.If br 0.90, what information does this provide on the number of futures contracts needed to construct a perfect macrohedge?
1. If LIBOR increases to 6 percent, what are the realized net cash flows on the swap? Evaluate at the forward rate.
1. Compute the number of futures contracts required to construct a perfect macrohedge if[ /( ) / /( )] . R R R R br f f 11 0 90
1. Refer again to problem 22. How does consideration of basis risk change your answers to problem 22?
1. If the FI wants a perfect macrohedge, how many Treasury bond futures contracts does it need?
1. What is a total return swap?
1. Suppose that the FI in part (c) macrohedges using Treasury bond futures that are currently priced at 96. What is the impact on the FI’s futures position if the relative change in all interest rates is an increase of 1 percent?That is, R /(1 R ) 0.01. Assume that the deliverable Treasury
1. What is the impact on the FI’s equity value if the relative change in interest rates is an increase of 1 percent? That is R /(1 R ) 0.01.
1. How can the FI use futures and forward contracts to put on a macrohedge?
1. What is the FI’s interest rate risk exposure?
1. Consider the following balance sheet (in millions) for an FI:What is the FI’s duration gap?
1. What causes futures contracts to have a different price sensitivity than assets in the spot markets?
1. If the implied rate on the deliverable bond in the futures market moves 12 percent more than the change in the discounted spot rate, how many futures contracts should be used to hedge the portfolio?
1. If interest rate changes in the spot market exactly match those in the futures market, what type of futures position should the mutual fund create?How many contracts should be used?
1. What is netting by novation?
1. How would your answer for part (b) in problem 17 change if the relationship of the price sensitivity of futures contracts to the price sensitivity of underlying bonds were br 0.92?A mutual fund plans to purchase $500,000 of 30-year Treasury bonds in four months. These bonds have a duration of
1. What is basis risk? What are the sources of basis risk?
1. If the bank had hedged with Treasury bill futures contracts that had a market value of $98 per $100 of face value (implying a discount rate of 8 percent), how many futures contracts would have been necessary to fully hedge the balance sheet?
1. Reconsider Tree Row Bank in problem 17 but assume that the cost rate on the liabilities is 6 percent.
1. The following problem refers to material in Appendix 25A.The following information is available on a three-year swap contract. Oneyear maturity zero-coupon discount yields are currently priced at par and pay a coupon rate of 5 percent. Two-year maturity zero-coupon discount yields are currently
1. What additional issues should be considered by the bank in choosing between T-bond and T-bill futures contracts?
1. Verify that the change in the futures position will offset the change in the cash balance sheet position for a change in market interest rates of plus 100 basis points and minus 50 basis points.If the bank had hedged with Treasury bill futures contracts that had a market value of $98 per $100
1. How many contracts are necessary to fully hedge the bank?
1. What are the realized cash flows expected over the three-year life of the swap?
1. What are the realized cash flows that occur over the three-year life of the swap if d2 4.95 percent and d3 6.1 percent?
1. Tree Row Bank has assets of $150 million, liabilities of $135 million, and equity of $15 million. The asset duration is six years, and the duration of the liabilities is four years. Market interest rates are 10 percent. Tree Row Bank wishes to hedge the balance sheet with Treasury bond futures
1. What is meant by fully hedging the balance sheet of an FI?
1. Which have higher yields, junk bonds or HLT loans? Explain your answer.
1. What is the meaning of the Treasury bond futures price quote 101–13?
1. Explain the main reason behind the explosion in loan sales in the 1980s.
1. For a given change in interest rates, why is the sensitivity of the price of a Treasury bond futures contract greater than the sensitivity of the price of a Treasury bill futures contract?8.9.a.b.c.d.e.10.a.b.c.d.11.12.13.a.b.c.d.14.Assets $150 Liabilities $135 Equity 15 Total $150 Total $150
1. If the existing interest rate on the liabilities is 6 percent, what will be the effect on net worth of a 1 percent increase in interest rates?
1. What will be the effect on net worth if interest rates increase 100 basis points?
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