Bond Markets Analysis And Strategies 6th Edition Frank J. Fabozzi - Solutions

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You work for a conservative investment management firm. You recently asked one of the senior partners for permission to open up a futures account so that you could trade interest-rate futures as well as cash instruments. He replied, "Are you crazy? I might as well write you a check, wish you good
The following excerpt appeared in the following article, "Duration," in the No- vember 16, 1992, issue of Derivatives Week, p. 9: "TSA Capital Management in Los Angeles must determine duration of the futures contract it uses in order to match it with the dollar duration of the underlying, explains
Suppose that an institutional investor wants to hedge a portfolio of mortgage pass-through securities using Treasury bond futures contracts. What are the risks associated with such a hedge?AppendixLO1
How could a money manager use a Treasury bond futures contract to hedge against increased interest rates over the next quarter?AppendixLO1
What risks are associated with hedging?AppendixLO1
Suppose that a manager wants to reduce the duration of a portfolio. Explain how this can be done using Treasury bond futures contracts.AppendixLO1
A manager wishes to hedge a bond with a par value of $20 million by selling Trea- sury bond futures. Suppose that (1) the conversion factor for the cheapest-to-de- liver issue is 0.91, (2) the price value of a basis point of the cheapest-to-deliver issue at the settlement date is 0.06895, and (3)
Explain why the implied repo rate is important in determining the cheapest-to-de- liver issue.AppendixLO1
What is the implied repo rate?AppendixLO1
Suppose that bond ABC is the underlying asset for a futures contract with settle- ment six months from now. You know the following about bond ABC and the futures contract: (1) In the cash market ABC is selling for $80 (par value is $100); (2) ABC pays $8 in coupon interest per year in two
Suppose that the conversion factor for a particular Treasury bond that is accept- able for delivery in a Treasury bond futures contract is 0.85 and that the futures price settles at 105. Assume also that the accrued interest for this Treasury bond is 4. What is the invoice price if the seller
Explain how the shape of the yield curve influences the theoretical price of a Treasury bond futures contract.AppendixLO1
How is the theoretical futures price of a Treasury bond futures contract affected by the delivery options granted to the short?AppendixLO1
What are the delivery options granted to the seller of the Treasury bond futures contract?AppendixLO1
Explain the asymmetric effect on the variation margin and cash flow for the short and long in an interest-rate futures contract when interest rates change.AppendixLO1
How do you think the cost of carry will affect the decision of the short as to when in the delivery month the short will elect to deliver?AppendixLO1
If the Eurodollar CD futures contract is quoted at 91.75, what is the annualized futures three-month LIBOR?AppendixLO1
What does it mean if the cost of carry is positive for a Treasury bond futures contract?AppendixLO1
a. What is counterparty risk?b. Why do both the buyer and seller of a forward contract face counterparty risk?AppendixLO1
Explain the differences between a futures contract and a forward contract.AppendixLO1
: Finally, identify potential external data sources that might provide some interesting perspectives that could be used to guide your key decisions. For our utility example, you might want to consider integrating local solar energy costs (to determine if solar energy is a feasible energy option) or
: Next, add a recommendations panel that has suggestions for each of the decisions that you captured in Step 2. For our utility example, one recommendation might be “Only water 3 days a week from 6:00 a.m. to 7:00 a.m. to save approximately $12.50 per month on your monthly water bill.” Or
: Think through how you as the user use this dashboard, website, or mobile to make decisions. Write down those decisions that you try to make from the website. For example, from your utility, you might want to make decisions about energy and water consumption, your waste/garbage plan, and maybe
: Select one of your organization's outward-facing dashboards, websites, or mobile apps. If not something from your organization, then select a website or dashboard that you use regularly. That might include something from your bank, credit card provider, cellular provider, or utility company. Grab
: Finally, use the prioritization matrix to rank each of the use cases vis-à-vis business value and implementation feasibility over the next 9 to 12 months.
: Use the data assessment worksheets to determine the relative business value and implementation feasibility of each of the identified data sources with respect to the different use cases.
: Then brainstorm the different data sources that you might need to support those use cases: Identify potential internal structured (transactional data sources, operational data sources) and unstructured (consumer comments, notes, work orders, purchase requests) data sources Identify potential
: Next we want to group the decisions into common use cases; that is, cluster those decisions that seem similar in their business or financial objectives.
: Next, brainstorm the key decisions that need to be made about each key business entity with respect to the targeted business initiative.
: Select one of your business initiatives, and then brainstorm the key business entities or strategic nouns that impact that selected business initiative. As a reminder, it is around the individual business entities that we want to capture the behaviors, tendencies, patterns, trends, preferences,
: Start by identifying your organization's key business initiatives over the next 9 to 12 months.
: List the cultural changes that your organization must address if it hopes to leverage big data to its fullest business potential. Flag the top two or three cultural challenges that might be the most difficult for your organization and list what you think the organization needs to do in order to
, describe how each key business process might be improved as it transitions along the five phases of the Big Data Business Model Maturity Index. Identify the customer, product, and operational ramifications that each of the five phases might have on the selected key business process.
: For the selected key business processes identified in
: List the four big data value drivers that are enabled by the economics of big data and describe how each might impact one of your organization's key business processes identified in Exercise #1.
: List two or three of your organization's key business processes. That is, write down two or three business processes that uniquely differentiate your organization from your competition.
How far can I push big data to power—even transform—my business models?
How do I compare to others with respect to my organization's adoption of big data as a business enabler?
How can I create new revenue or monetization opportunities?
Where and how should I start my big data journey?
: Brainstorm and write down data sources that might be useful in uncovering those key insights. Look both internally and externally for interesting data sources that might be useful. Tip: Think outside the box and imagine that you could access any data source in the world.
: Brainstorm and write down what (1) customer, (2) product, and (3) operational insights your organization would like to uncover in order to support the targeted business initiative. Start by capturing the different types of descriptive, predictive, and prescriptive questions you'd like to answer
: Identify a key business initiative for your organization, something the business is trying to accomplish over the next 9 to 12 months. It might be something like improve customer retention, optimize customer acquisition, reduce customer churn, optimize predictive maintenance, reduce revenue
a. In a basic credit-linked note, how does the maturity value differ compared to a standard bond structure?b. What is the maturity date of a credit- linked note?AppendixLO1
The following questions relate to synthetic collateralized debt obligations.a. What type of credit derivative is used in a synthetic CDO?b. Is the collateral manager a credit protec- tion buyer or credit protection seller?c. In what types of assets does the collateral manager invest?d. What happens
A portfolio manager has a view that the credit spread for the bonds of Zen.com will increase (i.e., widen) to more than the cur- rent 450 basis points in one year. How can the manager use a credit spread forward contract to capitalize on this view?AppendixLO1
The senior and junior portfolio managers of a mutual fund are discussing the use of credit spread options to control the expo- sure of a position in the fund. The senior portfolio manager believes that a credit spread put option should be employed. The junior portfolio manager believes that a
The manager of a bond portfolio enters into a European credit spread call option for Company W based on the credit spread widening from its current level of 320 basis points. Suppose that the strike credit spread for the option is 320 basis points and the notional amount is $20 million. Suppose
What is the advantage of a credit spread option where the underlying is a credit spread over a credit spread option where the underlying is a credit-risky bond whose strike price is established by a specified credit spread?AppendixLO1
Why is a risk factor used in determining the payoff for an option on a credit spread?AppendixLO1
How are credit default index swaps used by portfolio managers?AppendixLO1
a. Explain how a single-name credit default swap can be used by a portfolio manager who wants to short a reference entity.b. Explain how a single-name credit default swap can be used by a portfolio manager who is having difficulty acquiring the bonds of a particular corporation in the cash
How do the cash flows for a credit default index swap differ from that of a single-name credit default swap?AppendixLO1
a. For a single-name credit default swap, what is the difference between physical settlement and cash settlement?b. In physical settlement, why is there a cheapest-to-deliver issue?AppendixLO1
All other factors constant, for a given refer- ence obligation and a given scheduled term, explain whether a credit default swap using full or old restructuring or modified restruc- turing would be more expensive.AppendixLO1
Comment on the following statement: "Restructuring is included in credit default swaps and therefore the reduction in a refer- ence obligation's interest rate will result in the triggering of a payout. This exposes the protection seller to substantial risk."AppendixLO1
For a credit default swap with the following terms, indicate the quarterly premium payment. Quarterly Swap Premium Notional Days Days in Premium Amount Quarter Paymenta. 600 bps $15,000,000 90b. 450 bps $8,000,000c. 720 bps $15,000,000 91 92.AppendixLO1
a. What is a basket default swap?b. When does the protection seller have to make a payment to the protection buyer in a basket default swap?AppendixLO1
Why does a credit default swap have an option-type payoff?AppendixLO1
Marsha Brady is a fixed-income portfolio manager. After reviewing a research report issued by a major brokerage firm on Worldwide Global Communications Corporation in which it is suggested that within one year the firm's credit fundamen- tals will strengthen such that the market will demand a lower
Why is the total return receiver in a total return swap exposed to more than just credit risk?AppendixLO1
Explain how a total return swap can be used by a portfolio manager to effectively short corporate bonds.AppendixLO1
Explain how a total return swap can be used by a portfolio manager to increase credit exposure to several issuers of corporate bonds.AppendixLO1
a. What is an asset swap?b. Is an asset swap a true credit derivative?AppendixLO1
Why is "restructuring" the most controver- sial credit event?AppendixLO1
What authoritative source is used for defin- ing a "credit event"?AppendixLO1
What is meant bya. a reference entity?b. a reference obligation?AppendixLO1
Rating transition tables published periodi- cally by rating agencies indicate the percent- age of issues with a specific rating change over some specified time period (e.g., one year). How can a rating transition table be used by a portfolio manager to assess down- grade risk?AppendixLO1
Why is a portfolio manager concerned with more than default risk when assessing a portfolio's credit exposure?AppendixLO1
Value a three-year interest rate floor with a $10 million notional amount and a floor rate of 4.8% using the binomial interest-rate tree. shown in Exhibit 28-11.AppendixLO1
How can an interest-rate collar be created?AppendixLO1
What is the relationship between an interest- rate agreement and an option on an interest rate?AppendixLO1
Suppose that a savings and loan association buys an interest-rate cap that has these terms: The reference rate is the six-month "Treasury bill rate; the cap will last for five years; pay- ment is semiannual; the strike rate is 5.5%; and the notional amount is $10 million. Suppose further that at
An interest-rate swap had an original maturity of five years. Today, the swap has two years to maturity. The present value of the fixed-rate payments for the remainder of the term of the swap is $910,000. The present value of the floating-rate payments for the remainder of the swap is $710,000.a.
a. Suppose that at the inception of a five- year interest-rate swap in which the refer- cncc rate io three-month LIBOR, the pre- sent value of the floating-rate payments is $16,555,000. The fixed-rate payments are assumed to be semiannual. Assume also that the following is computed for the
Given the current three-month LIBOR and the Eurodollar CD futures prices shown in the table below, compute the forward rate and the forward discount factor for each period. Current Eurodollar Days in 3-Month CD Futures Period Quarter LIBOR Price 1 90 5.90% 2 91 93.90 3 92 93.70 4 92 93.45 5 90
a. Assume that the swap rate for an interest- rate swap is 7% and that the fixed-rate swap payments are made quarterly on an actual/360 basis. If the notional amount of a two-year swap is $20 million, what is the fixed-rate payment at the end of each quarter assuming the following number of days in
Consider the following interest-rate swap: the swap starts today, January 1 of year 1 the floating-rate payments are made quarterly based on actual/360 the reference rate is three-month LIBOR the notional amount of the swap is $40 million the term of the swap is three yearsa. Suppose that today's
The manager of a savings and loan associa- tion is considering the use of a swap as part of its asset/liability strategy. The swap would be used to convert the payments of its port- folio of fixed-rate residential mortgage loans into a floating payment.a. What is the risk with using a plain vanilla
A portfolio manager buys a swaption with a strike rate of 6.5% that entitles the portfolio manager to enter into an interest-rate swap to pay a fixed rate and receive a floating rate. The term of the swaption is five years.a. Is this swaption a payer swaption or a receiver swaption? Explain.b. What
The following excerpt is taken from an article titled "IRS Rule to Open Swaps to Pension Funds," which appeared in the November 18, 1991, issue of BondWeek, pp. 1-2: A proposed Internal Revenue Service rule that gives tax-free status to income earned on swaps by pension funds and other tax-exempt
Here are some excerpts from an article titled "It's Boom Time for Bond Options as Interest-Rate Hedges Bloom," published in the November 8, 1990, issue of the Wall Street Journal:a. "The threat of a large interest-rate swing in either direction is driving people to options to hedge their portfolios
In a description of the CBOT 10-year Municipal Note Index futures contract, the following appears: "CBOT municipal note futures correlate closely with portfolios of tax-exempt securities, offering targeted and effective hedges." Why is the correla- tion important to the success of this futures
You work for a conservative investment management firm. You recently asked one of the senior partners for permission to open up a futures account so that you could trade interest-rate futures as well as cash instruments. He replied, "Are you crazy? I might as well write you a check, wish you good
The following excerpt appeared in the arti- cle, "Duration," in the November 16, 1992, issue of Derivatives Week, p. 9: "TSA Capital Management in Los Angeles must deter- mine duration of the futures contract it uses in order to match it with the dollar duration of the underlying, explains David
Suppose that an institutional investor wants to hedge a portfolio of mortgage pass-through securities using Treasury bond futures contracts. What are the risks associated with such a hedge?AppendixLO1
How could a money manager use a Treasury bond futures contract to hedge against increased interest rates over the next quarter?AppendixLO1
What risks are associated with hedging?AppendixLO1
Suppose that a manager wants to reduce the duration of a portfolio. Explain how this can be done using Treasury bond futures contracts.AppendixLO1
A manager wishes to hedge a bond with a par value of $20 million by selling Treasury bond futures. Suppose that (1) the conver- sion factor for the cheapest-to-deliver issue is 0.91, (2) the price value of a basis point of the cheapest-to-deliver issue at the set- tlement date is 0.06895, and (3)
a. What is the underlying for the CBOT 10-year municipal note index futures con- tract?b. Why is the contract cash settled?AppendixLO1
Explain why the implied repo rate is impor- tant in determining the cheapest-to-deliver issue.AppendixLO1
What is the implied repo rate?AppendixLO1
Suppose that the conversion factor for a particular Treasury bond that is acceptable. for delivery in a Treasury bond futures con- tract is 0.85 and that the futures price settles at 105. Assume also that the accrued interest for this Treasury bond is 4. What is the invoice price if the seller
Explain how the shape of the yield curve influences the theoretical price of a Treasury bond futures contract.AppendixLO1
How is the theoretical futures price of a Treasury bond futures contract affected by the delivery options granted to the short?AppendixLO1
What are the delivery options granted to the seller of the Treasury bond futures contract?AppendixLO1
Explain the asymmetric effect on the varia- tion margin and cash flow for the short and long in an interest-rate futures contract when interest rates change.AppendixLO1
How do you think the cost of carry will affect the decision of the short as to when in the delivery month the short will elect to deliver?AppendixLO1
If the Eurodollar CD futures contract is quoted at 91.75, what is the annualized futures three-month LIBOR?AppendixLO1

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