FRM interest rate future Assignment

FRM interest rate future Assignment Words: 307

A treasurer of an American company in March realizes that it needs to raise $25 million zero-coupon bond in August for a period of 6 months. Zero-coupon bond of similar quality is currently yielding 4%, a cost, which the treasurer finds acceptable(e) The treasurer is of the view that interest rate will rise before the company will issue the debt, hence will increase the cost of debt. So to hedge the interest rate risk the treasurer decided to hedge the risk using September Arteriolar futures contract.

September 90-day Arteriolar futures contracts are currently trading at 96. 25. You are required to a. Explain how treasurer can hedge the risk through Arteriolar futures contract? How many futures contracts are required to hedge? B. If the September futures contract in August closes either at 95. 75 or 96. 80, calculate the cost of the bond to the company in each case. 4 a. The treasurer can hedge the risk by selling Arteriolar futures contract.

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The short futures position will lead to profit it interest rate rises, which will reduce the interest outflow on debt. The contract price of September futures $ [1-0. 0375 ‘0. 25] $ 990,625 If the company issue debt now, it can realize = +0. XX. 04) = $ The duration of the bond is twice that of Arteriolar deposit underlying the futures contract, hence number of futures contract to be sold 24509804/990625 ‘ 2 = 49. 48 = 50 contracts. B. In August, Arteriolar futures contract is at 95. 75, it meaner yield has risen to 4. 5%, so it can issue bond at 4. 50%. Company will realize = +0. XX. 045) = $ 24449878 Gate futures 95. 75) 100 25 ’50 = $62,500 Total amount realized = 24449878 + 62500 = $ Cost of zero-coupon bond ?? – 3. 98% If Arteriolar futures contract closes at 96. 80, it meaner that yield has fallen to 3. 20%, so it can issue bond at 3. 45%. Company will realize = +0. EX.. 0345) = $ LOSS futures market = (96. 80 – 96. 25) x 100 x 25 x 50 = $ 68,750 Net amount realized – 68,750 Cost of zero-coupon bond 4. 02% FROM interest rate future By Deplorableness

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