John Hanes serves as a portfolio manager for Stackhouse Investments. One of his clients, the Red Wing Corporation, holds a $50 million face value position in a T-bill that matures in 182 days on March 21 (today is September 21). Red Wing also owns a $100 million position in a floating rate note (FRN) that matures in one year, pays LIBOR plus 25bp and has interest rate reset dates on December 21, March 21, and June 21. Red Wing has indicated that they need to sell the T-bill investment sooner than anticipated to fund an unexpected series of cash outflows. Which of the following positions would effectively shorten the maturity of your client's Treasury bill investment and hedge your client against adverse movements in interest rates until the sale date? | A) | Buy 50 T-bill futures contracts. |
| | B) | Buy 500 T-bill futures contracts. |
| C) | Sell 50 T-bill futures contracts. |
| | D) | Sell 500 T-bill futures contracts. |
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Answer and Explanation
Since the client owns $50 million of face value of the T-bill, we should sell 50 December T-bill futures contracts. We sell 50 contracts because each contract controls a $1 million T-bill with a 90-92 day maturity upon expiration of the futures.
Assuming interest rates rise, which of the following CORRECTLY describes the outcome regarding the ultimate disposal of the T-bill?
| A) | The T-bill futures contract will lose value, but the Treasury bill will gain in value to offset the loss. |
| B) | The T-bill will lose value, but the short T-bill futures contracts will gain in value to offset the loss. |
| | C) | The holdings of T-bill futures contracts will have to be reduced (rebalanced) in order to maintain the current hedged relationship. |
| | D) | The holdings of T-bill futures contracts will have to be increased (rebalanced) in order to maintain the current hedged relationship. |
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Answer and Explanation
This position will also hedge your client against adverse movements in interest rates should he decide to sell before the expiry of the T-bill futures. If interest rates rise, the T-bill will lose value, but the short T-bill futures position will gain value to offset this loss.
Which of the following is a methodology that could be employed to convert your client's FRN to a one-year fixed rate structure?
A) | Enter into a one-year, quarterly, receive-fixed interest rate swap. |
| | B) | Enter into an interest rate collar. |
| | C) | Purchase an interest rate cap. |
| | D) | Purchase a call option on the LIBOR. |
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Answer and Explanation
The swap will have a single fixed rate that will be received on a quarterly basis. The LIBOR payments from the swap will cancel with the LIBOR receipts from the clients FRN. The net cash flow will be the swap fixed rate plus 25bp.
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发表于 2008-9-15 15:33
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