标题: Another derivatives questions [打印本页] 作者: Walex 时间: 2011-7-13 15:28 标题: 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?作者: hassan 时间: 2011-7-13 15:28
I think B is still correct but the question asks which option will BEST reduce their i risk. Shorting Eurodollar futures would probably better hedge his position that the interest rate floor. With the floor he will lose money until rates hit the 6.00% floor.作者: 19831985 时间: 2011-7-13 15:28
Ok. Since he sold a floating rate bond. His risk is going rates up. How is this equivalent to Short Euro Dollar?作者: tianxin 时间: 2011-7-13 15:28
he issued a floater , his risk is rates up
no floor will help here only the future作者: tarunajwani 时间: 2011-7-13 15:28
^^long eurodollar future=right to BORROW at X not lend.
Am I right?作者: 5566 时间: 2011-7-13 15:28
bhans2 Wrote:
-------------------------------------------------------
> It is kind of counter-intuitive, going long a
> Eurodollar future gives you the right to lend USD
> at X and going short allows you to borrow USD at
> X. So as interest rates rise (eurodollars are
> based on libor) the short makes money and offsets
> the money you lose on having to pay more interest
> on the floating rate bond.
Good explanation. Thanks作者: SpyAli 时间: 2011-7-13 15:28
