Assets Liabilities 91 day US Treasury bills $700 1 year Certificates of Deposit $975 2 year EIDL Loans $975 coupon 0 15 p a annually Fixed rate, coupon 1 95 p a annually Demand Deposits $800 10 year US Treasury bonds $500 15 year Subordinated Bonds $400 Coupon rate 3 pa Fixed Rate, coupon 4 p a quarterly 10 year floating rate commercial loans Repriced quarterly $300 Equity Notes The 91day US Treasury bills yield 1 25 p a The 2 year EIDL Loans yield 4 p a The 10 year US Treasury Bonds yield 2 5 p a and have a duration of 8 75 years The floating rate commercial loans are priced at a 5 discount from face value and pay LIBOR plus 75 basis points The 15 year Subordinated bullet bonds yield 3 8 p a and have a duration of 11 4 years The demand deposits are non interest bearing and turn over every month on average Both the CDs and the demand deposits are priced at par All instruments are non amortizing, and there are no run offs Eurodollar futures prices are currently 99 15 The dollar cost of the futures contract is In order to hedge the interest rate risk in question 6, one could Using the Eurodollar futures price in question 7, what is the impact of a 50 basis point increase in interest rates on a short futures position (That is, R (1 R) is equal to an increase of 50 basis points ) Construct a perfect hedge for Any Ole Bank using the Eurodollar futures contract in question 7 Which manager is more risk averse Manager A who recommends the sale of 100 Eurodollar futures contracts or Manager B who recommends the sale of 700 Eurodollar futures contracts instead of the perfect hedge in question 10 Consider the following Eurodollar futures options Which options are in the money (using the current Eurodollar futures price in question 7) Use the at the money option to construct a perfect interest rate risk hedge for Any Ole Bank If you consider the cost of the option premium, how does your answer to question 13 change Using the options in question 12, the following collar hedges Any Ole Banks interest rate risk exposure Which of the following collars generates a positive upfront cash inflow (collar premium)

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Posted on Oct 07, 2024

Assets: Liabilities: 91 day US Treasury bills $700 1 year Certificates of Deposit $975 2 year EIDL Loans $975 coupon=0.15% p.a. annually Fixed rate, coupon=1.95%

Assets: Liabilities: 91 day US Treasury bills $700 1 year Certificates of Deposit $975 2 year EIDL Loans $975 coupon=0.15% p.a. annually Fixed rate, coupon=1.95% p.a. annually Demand Deposits $800 10 year US Treasury bonds $500 15 year Subordinated Bonds $400 Coupon rate=3% pa. Fixed Rate, coupon=4% p.a. quarterly 10 year floating rate commercial loans Repriced quarterly $300 Equity Notes: The 91day US Treasury bills yield 1.25% p.a. The 2 year EIDL Loans yield 4% p.a. The 10 year US Treasury Bonds yield 2.5% p.a. and have a duration of 8.75 years. The floating rate commercial loans are priced at a 5% discount from face value and pay LIBOR plus 75 basis points. The 15 year Subordinated bullet bonds yield 3.8% p.a. and have a duration of 11.4 years. The demand deposits are non-interest bearing and turn over every month on average. Both the CDs and the demand deposits are priced at par. All instruments are non-amortizing, and there are no run-offs.

Eurodollar futures prices are currently 99.15. The dollar cost of the futures contract is:
In order to hedge the interest rate risk in question 6, one could:
Using the Eurodollar futures price in question 7, what is the impact of a 50 basis point increase in interest rates on a short futures position? (That is, R/(1+R) is equal to an increase of 50 basis points.)
Construct a perfect hedge for Any Ole Bank using the Eurodollar futures contract in question 7.
Which manager is more risk averse: Manager A who recommends the sale of 100 Eurodollar futures contracts or Manager B who recommends the sale of 700 Eurodollar futures contracts instead of the perfect hedge in question 10?
Consider the following Eurodollar futures options: Which options are in-the-money (using the current Eurodollar futures price in question 7)?
Use the at-the-money option to construct a perfect interest rate risk hedge for Any Ole Bank.
If you consider the cost of the option premium, how does your answer to question 13 change?
Using the options in question 12, the following collar hedges Any Ole Banks interest rate risk exposure: