Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Let's say you think that interest rates are going to rise over the next six months. You're the CFO of a coma haha bond payment
Let's say you think that interest rates are going to rise over the next six months. You're the CFO of a coma haha bond payment that's coming due, and the interest rate is variable (ie, it depends on what LIBOR is at that time. What should you do with an interest rate future if you want to hedge this rate rise risk? (Hint: Think about your answer to Question 3 on the front page). Let's put some numbers to the above situation. 5a) Your bond payment is your Face Value times the LIBOR rate in six months (plus a 2% credit spread). Face Value is $10 million. If the annual LIBOR rate ends up at 3.25% in six-months, what's your semiannual interest rate payment in six months 5.6.) Suppose you sold a futures contract to hedge this position (when interest rates rise, interest rate future prices fall...) Futures price for a 6-month US futures contract is 96.50. What's the annual Effective Yield on this futures contract? IFLIBOR in 6 months actually ended up at 3.25%, what's the gain or loss as a result of hedging? hint: Gain or Loss Interest Rate Due (in 6 months) - Effective Yield on interest Rate Futures (in 6 months) Likewise, what if interest rates rise to 6.25%? What's the gain or loss as a result of hedging? Time permitting, please log on to your Interactive Brokers account. Look up the EuroDollar interest rate futures price on the CME Specifically on the Order Entry screen, type GE, press Enter, then select GLOBEX Euro-Dollar > Futures. According to these prices, what's the Annualized Effective Yield for the six month maturity
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered 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