Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Consider a United States Treasury Note with a coupon of 5% and ten-year maturity. An investor needs to buy it next month. What are her
Consider a United States Treasury Note with a coupon of 5% and ten-year maturity.
- An investor needs to buy it next month. What are her interest rate risks (does she lose if rates go up or down)?
- What kind of forward contract arrangement should she enter into order to reduce (hedge) her risk?
- Another investor already owns this UST Note but plans to sell it in a month. What is his interest rate risk? What should his forward contract position be in order to remove that risk?
A speculator thinks interest rates will be going down within the next month.
- What does she do in the regular i.e., cash or spot market to express her view?
- What can she do using the above forward contract to achieve the same result but without actually buying the note (and paying for it) now? Describe the dynamics of the process on the contract date and on the settlement date.
- Another speculator thinks interest rates will be going up within the next month. What does he do in the cash market to express his view? What can he do using the above forward contract to achieve the same result but without actually borrowing the note to sell it short?
Cash Settlement. How would each of the above use cash settled forward note contracts?
Extra Credit. How would a hedger, who owns a thirty-year Treasury bond with the same coupon, use this forward contract on the ten-year note to hedge?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started