Question 3 Answer all parts of the question a suppose that a Fl has 75 million assets and 125 million liabilities denominated in Yen (V). The spot rate is currently 0.6667/8. The 1-year Yen futures contract is available for 0.6579/ and is in standardised units of x 12,500,000. (Note that rates are quoted per Y 100) i. What is the Fl net exposure? (6 marks) il is the Fl exposed to a Yen appreciation or depreciation? (5 marks) ill. What is the number of futures contracts to be utilised to fully hedge the FI currency exposure? (10 marks) iv. If the spot rate changes to 0.6897/what would the impact be on the Fl currency exposure (show 2 ways to address this)? Assume no hedging. (20 marks) V. If the y futures price changes to 0.6349/4 what would be the impact on the FI futures position. (10 marks) vi. Using the information in parts (iv) and (v), what can you conclude about basis risk and the relationship between spot and futures rates? (10 marks) b) A UK bank has made a loan commitment (obligation to provide a loan) of 10 million that is likely to be withdrawn in six months. The current spot rate is 0.607. 1. What is the institution's FX exposure? (5 marks) ii. What should the bank's position be using futures or options? (5 marks) ili. If the spot rate six months from today is 0.64/, what is the amount needed if the loan is drawn down? (10 marks) iv. A six-month futures contract is available for 0.61/ (assume that spot and futures prices are equal at maturity). Furthermore, calls and puts with an exercise price of 0.61/ are selling for 0.02 and 0.03 respectively. Given the above information, which market should the bank use? (20 marks) Question 3 Answer all parts of the question a suppose that a Fl has 75 million assets and 125 million liabilities denominated in Yen (V). The spot rate is currently 0.6667/8. The 1-year Yen futures contract is available for 0.6579/ and is in standardised units of x 12,500,000. (Note that rates are quoted per Y 100) i. What is the Fl net exposure? (6 marks) il is the Fl exposed to a Yen appreciation or depreciation? (5 marks) ill. What is the number of futures contracts to be utilised to fully hedge the FI currency exposure? (10 marks) iv. If the spot rate changes to 0.6897/what would the impact be on the Fl currency exposure (show 2 ways to address this)? Assume no hedging. (20 marks) V. If the y futures price changes to 0.6349/4 what would be the impact on the FI futures position. (10 marks) vi. Using the information in parts (iv) and (v), what can you conclude about basis risk and the relationship between spot and futures rates? (10 marks) b) A UK bank has made a loan commitment (obligation to provide a loan) of 10 million that is likely to be withdrawn in six months. The current spot rate is 0.607. 1. What is the institution's FX exposure? (5 marks) ii. What should the bank's position be using futures or options? (5 marks) ili. If the spot rate six months from today is 0.64/, what is the amount needed if the loan is drawn down? (10 marks) iv. A six-month futures contract is available for 0.61/ (assume that spot and futures prices are equal at maturity). Furthermore, calls and puts with an exercise price of 0.61/ are selling for 0.02 and 0.03 respectively. Given the above information, which market should the bank use? (20 marks)
