Another derivatives questions
Table 2
Interest Rate Instruments
Dollar Amount of Floating Rate Bond
$42,000,000
Floating Rate Bond paying LIBOR +
0.25%
Time to Maturity (years)
8
Cap Strike Rate
7.00%
Floor Strike Rate
6.00%
Interest Payments
quarterly
Bower shorts the floating rate bond given in Table 2. Which of the following will best reduce Bower's interest rate risk?
A) Shorting Eurodollar futures.
B) Buying an interest rate floor.
C) Shorting an interest rate floor.
Your answer: B was incorrect. The correct answer was A) Shorting Eurodollar futures.
If he adds a short position in Eurodollar futures to the existing liability in the correct amount, he is able to lock in a specific interest rate. A short Eurodollar position will increase in value if interest rates rise because the contract is quoted as a discount instrument so increases in rates reduce the futures price. (Study Session 17, LOS 62.a)
My reasoning was
Here is Shorting a bond, that means interest rates rises, he likes it. If interest rates fall, he will be losing. Shouldn't he buy a interest rate floor then? |
发表于 2011-7-13 15:28
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