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Module 6 Critical Thinking: Financial Futures & Interest-Rate Options

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Module 6 Critical Thinking: Financial Futures & Interest-Rate Options (100 points);Part A: Interest rate futures;1.;Assume that Blue Sunday Bank has $200 million of assets with an average duration of 1.6 years;and liabilities of $100 million with an average duration of 1.95 years. Compute the current;duration gap of this bank. Assuming that U.S. Treasury bonds with a duration of 1.2 years are;currently quoted in the market at 98-16, explain the position (buy or sell) in a futures contract;(including the number of contracts) that the bank manager should take to eliminate interest rate;risk.;The following quotes will be used for the next two parts of this problem.;5-Year U.S. Treasury Bond Futures Contract Quotes from 6/27/2013;CBT $100,000, pts 32nd of 100%;Prior;Settle;Open;Jun 2013 121'240 a +0'102;121'137;121'220;121'250 b 121'210;92;4:15:23 PM CT;6/27/2013;Sep 2013 121'015 b +0'112;120'222;120'237;121'030;666,982;4:15:23 PM CT;6/27/2013;Month;Last;Change;High;Low;120'210;Volume;Updated;Source: CME Group. (2013, June 27). 5-year U.S. Treasury note futures. Retrieved from;http://www.cmegroup.com/trading/interest-rates/us-treasury/5-year-us-treasurynote_quotes_globex.html#prodType=AME;Eurodollar Future Contracts Quotes on 6/27/2013;CME - $100,000, pts of 100%;Month;Last;Change;Prior;Settle;Open;High;Low;Volume;Updated;Jul 2013 99.7225 +0.0025 99.72 99.7225 99.7250 99.7200 9,880;4:06:35 PM CT;6/27/2013;Aug 2013 99.710 b +0.015 99.695 99.700 99.710 99.700;3,290;4:06:35 PM CT;6/27/2013;Sep 2013 99.685 b +0.020 99.665 99.675 99.690 99.670;98,488 4:06:35 PM CT;6/27/2013;Oct 2013 99.665;+0.020 99.645 99.660 99.665 99.655 a 21;4:06:35 PM CT;6/27/2013;Source: CME Group. (2013, June 27). Eurodollar futures. Retrieved from;http://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_globex.html;2.;Ignoring your work from Part 1, assume that the manager chooses to hedge the banks risk by;buying (long) twenty 5-year U.S. Treasury bond futures contracts with an expiration of;September, 2013. Use the quotes given in the table above where the contract price is the Last;quote and the apostrophe replaces the dash seen in your textbook. An initial margin is;deposited for all contracts as noted in the text. You can ignore any potential margin calls on this;problem.;a. If interest rates rise, will the bankers position be favorable? Why or why not?;b. If at the end of the contract (September 2013), the manager reverses the banks;position (sells all 20 contracts) and the contract is now quoted at 11416, how much;money was made or lost on the futures contract?;c. Given the initial margin, what is the holding period rate of return (i.e., profit/initial;margin)?;3.;Use the quotes above 2 for this question also. Ignoring your work from Parts 1 & 2, now assume;the bank is in an entirely different position and the manager chooses to hedge the banks risk by;selling (short) fifteen Eurodollar contracts with an expiration of August 2013. The contract price;is the Last quote. An initial margin is deposited for all contracts as noted in your textbook. You;can ignore potential margin calls on this problem.;a.;b.;If at the end of the contract (August 2013), the manager reverses the banks position;(buys all 15 contracts) and the contract is now quoted at 98.95, how much money was;made or lost on the futures contract?;Given the initial margin, what is the holding period rate of return?;Part 2: Interest rate options;Below are snippets of the September 2013 option Eurodollar quotes (notice the first set of quotes is for;calls and the second is for puts). Note that on the date of these quotes, the Eurodollar future is quoted at;1.30170 or 130.170% of the contract size, which is $1 million. The option prices in these quotes are given;as % of $1,000,000. For example, the cost of the 1165 Call option =.1513% of $1,000,000 or $1513.;Use these quotes to compute the profit or loss on the following option positions if when the options;expire, the Eurodollar is quoted at 1175 or 117.5% of $1 million. In all cases, you are computing the;profit or loss for ONE CONTRACT assuming that the option was purchased (or sold) at the Last rate (see;bolded column name).;Session: September 2013 Eurodollar Calls;Open;High;Low;Last;Time;15:30;future 1.30430 1.31080 1.29950 1.30170;Jun 28;16:34;1165;0.15130;Jun 27;16:34;1170;0.14690;Jun 27;16:34;1175;0.14260;Jun 27;16:34;1180;0.13840;Jun 27;16:34;1185;0.13420;Jun 27;16:34;1190;0.13000;Jun 27;Strike;Set;Chg;Pr. Day;Set;Vol;Op Int;1.30230 -0.00290 231530 1.30520 200611;0.13750 -0.00290;-;0.14040;-;0.13260 -0.00290;-;0.13550;-;0.12760 -0.00300;-;0.13060;-;0.12270 -0.00300;-;0.12570;-;0.11780 -0.00300;-;0.12080;-;0.11300 -0.00300;-;0.11600;-;Expiry;1195;Strike;-;-;-;0.12590;Session: September, 2013 Puts;Open;High;Low;Last;future 1.30430 1.31080 1.29950 1.30190;1160;1165;1170;1175;1180;1185;0.00030 0.00030 0.00030 0.00030;-;-;-;0.00045;0.00040 0.00060 0.00040 0.00060;-;-;-;0.00070;0.00060 0.00060 0.00050 0.00050;-;-;-;0.00100;1190;0.00070 0.00070 0.00070 0.00070;1195;0.00100 0.00100 0.00100 0.00100;1200;0.00100 0.00130 0.00100 0.00130;16:34;0.10820 -0.00290;Jun 27;Time;15:31;Jun 28;09:11;Jun 28;16:34;Jun 27;13:15;Jun 28;16:34;Jun 27;08:04;Jun 28;16:34;Jun 27;08:03;Jun 28;09:46;Jun 28;13:44;Jun 28;Set;Chg;-;0.11110;Pr. Day;Set;Vol;-;Op Int;Expiry;1.30230 -0.00290 231530 1.30520 200611;0.00030 -0.00005 9;0.00035 -0.00005;0.00035 412;-;0.00045 -0.00005 21;0.00050 -0.00010;0.00040 22;0.00050 356;-;0.00060 85;0.00060 -0.00010 5;0.00070 749;0.00070 -0.00010 1;0.00080 301;0.00090 -0.00010 2;0.00100 328;0.00110;-;10;0.00110 310;0.00130;-;179;0.00130 3711;Option quotes for Eurodollar futures contracts;Source: TradingCharts.com. (2013). Commodities futures price quotes. Retrieved;fromhttp://futures.tradingcharts.com/marketquotes/E6.html;Compute the profit or loss assuming the following positions (again, assuming that at maturity Eurodollars;are quoted at 1175).;1.;2.;3.;4.;5.;6.;7.;8.;You buy a 1165 call.;You buy a 1165 put.;You buy a 1190 call.;You buy a 1190 put.;You sell a 1195 call.;You sell a 1195 put.;You sell a 1170 call.;You sell a 1170 put.;Be sure to organize and label your work appropriately and submit only one document for grading. Upload;your completed spreadsheet to the Week 6 Assignments page.

 

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