Answer Happy

3. Suppose you want to hodge a 5100 million commercial loan that will mature (be repaid) May 31, 2016. This type of loan is indexed to LIBOR, so you see that the Farodollar futures and futures options are appropriate hedging instruments Information on these contracts is on the following page. Describe the interest rate risk position of this institution. Whunt futures position is appropriate? (That is, specifically identify which contract maturity and what position, long or short, you need to take.) Briefly explain how the position provides the desired hedge. Which futures option position provides similar protection (20 points) Assume that it is now May 31 and you want to close your position Sports are now 5.45% and the futures price is 9450. Determine the profit or ons from your futures hedge (per contract) (Recall that the value per basis point change in the Farodollar future price is $25). (1 points) Suppose the commercial loan has been repaid, and you have a new 5100 million, three year on in the commercial lending portfolio. This loan make quarterly payments of principal and interest with the interest rate for each guterBOR 100% on the beginning date of that quarter. The loan is funded with three year CDi paying 63% Explain clearly completely how a swap could be used to hedge the interest rate risk faced here. Explain how the bank could use a cap or floor instead. What are the tradeofh between using a swap or a cap or floor for the bank? Information for Question 3 LIROR Cwh (Spot) Rates 53200% one month $ 3500% three months 5.3291% six months Eurodollar Future Quotes May 946850 Jun 94.7250 Jul 94.750 3.315 3275 3.215 Purodollar Futures Options Quotes Puts May 0.165 Strike Price 9457 9500 9512 9525 May 0.015 0.012 0.007 0.000 Calls Jos 0030 0.015 0.010 005 0120 0280 0397 0.517
3. Suppose you want to hedge a $100 million commercial loan that will mature (be repaid) May 31, 20xx. This type of loan is indexed to LIBOR, so you see that the Eurodollar futures and futures options are appropriate hedging instruments. Information on these contracts is on the following page. a. Describe the interest rate risk position of this institution. What futures position is appropriate? (That is, specifically identify which contract maturity and what position, long or short, you need to take.) Briefly explain how the position provides the desired hedge. Which futures option position provides similar protection? (20 points) b. Assume that it is now May 31 and you want to close your position. Spot rates are now 5.45%, and the futures price is 94.50. Determine the profit or loss from your futures hedge (per contract) [Recall that the value per basis point change in the Eurodollar futures price is $25]. (10 points) C.
c. Suppose the commercial loan has been repaid, and you have a new $100 million, three year loan in the commercial lending portfolio. This loan makes quarterly payments of principal and interest, with the interest rate for each quarter set at LIBOR +1.00% on the beginning date of that quarter. The loan is funded with three-year CDs paying 6.5%. Explain clearly and completely how a swap could be used to hedge the interest rate risk faced here. Explain how the bank could use a cap or floor instead. What are the tradeoffs between using a swap or a cap or floor for the bank? E
Information for Question 3 LIBOR Cash (Spot) Rates 5.3200% one month 5.3500% three months 5.3291% six months Eurodollar Futures Quotes May 94.6850 Jun 94.7250 Jul 94.7850 5.315 5.275 5.215 Eurodollar Futures Options Quotes May 0.165 E Strike Price 9487 9500 9512 9525 May 0.015 0.012 0.007 0.003 Calls Jun 0.030 0.015 0.010 .005 Puts Jun 0.170 0.280 0.397 0.517